Indian public sector banks are buckling up to ride the expected boom in trade with Iran, once western nations lift sanctions on India’s ally and long-time trading partner in West Asia, a report says.
The July 14 announcement, which paves the way for lifting sanctions that crippled the Iranian economy, holds potential for these banks to support that country’s oil exports to India and the potential for Indian exports of food grains, pharmaceuticals and information technology-led services, India’s Live Mint reported on Monday.
Top bankers from State Bank of India, Punjab National Bank and IDBI Bank said they were waiting for clarity on when and how sanctions will be lifted to reactivate old business links and ensure full-fledged banking services to support bilateral trade.
SBI chairperson Arundhati Bhattacharya said the bank is looking to rekindle its trade flow-related business with Iran, which it had lost because of the western sanctions.
“We have many customers importing oil and exporting products like steel, basmati rice etc. SBI was losing all of these trade flow-related business,” Bhattacharya said.
Since the sanctions were imposed, trade between India and Iran has been processed through a peculiar arrangement handled by Kolkata-based public sector UCO Bank Ltd, in which payments for oil imported from Iran are matched with exports of mostly food grains to the country, all in Indian currency.
Thanks to their old links, public sector banks are well-placed to take advantage of the expected increase in trade. Besides, they process almost all of the government’s oil payments, which dominate trade between the two countries.
Under a special arrangement between the two governments, Iran was allowed to open rupee accounts at UCO Bank. All payments of oil imports from Iran were denominated in rupees and directed to this account. This was then matched with the value of exports from India.
Though this helped circumvent western sanctions, it restricted trade between the two countries, because India’s exports were severely limited by the amount of oil imported from Iran.
According to Bloomberg data, India was Iran’s third largest trading partner in 2014 with total trade valued at $16.1 billion, behind China and the United Arab Emirates. Iran, in contrast, is not even in the top 15 trading partners of India.
Before the sanctions were imposed in 2011, Iran was India’s second largest supplier of crude oil, behind Saudi Arabia. In 2012-13, it was at the seventh position.
Ajit Ranade, chief economist at Aditya Birla Group, estimates that easing sanctions could lead to a change in this scenario.
“Trade between India and Iran can easily double in three to five years. Of course, oil will continue to dominate, but the potential is huge for India to export pharmaceuticals, chemicals, IT-related services and also for infrastructure companies to build roads, railway and bridges in Iran, which is a big opportunity,” Ranade said.
“Iran has historical cultural links with India. Its per capita income is high and they are also highly rated in terms of social indicators like literacy and women’s empowerment. These are good signs economically that India can take advantage of.”
Bhattacharya said Indian construction firms could also help earn export revenues from Iran.
“Our construction firms at one time were undertaking many projects in Iran. They too can consider new projects which will be good for the country’s export numbers,” she said.
UCO Bank chairman and managing director, Arun Kaul, acknowledged that his bank enjoyed the benefits of being the only lender to service Iranian trade and may have to face more competition now.
“But we are waiting for more clarity on how the sanctions will impact and directions from the government on how the payments from Iran will be processed post this change,” he said.
UCO Bank stepped up to process payments from Iran because it has a limited presence overseas with a branch each in Singapore and Hong Kong and hence was not much impacted by sanctions from European and US governments, Kaul said.
R.K. Bansal, executive director at IDBI Bank, said he is confident that trade between the two countries will rise post the sanctions and his bank will “look at it 100%.”
Ram Sangapure, executive director at Delhi-based PNB, also said his bank is looking to revive old trade links with Iran. “This will be an opportunity for other banks now. Together with the traditional links, there are also opportunities for medium and small enterprises in India, which we can explore,” he said.
