With India-Iran trade at standstill, banks set to lose low cost deposits

For about last six months, India has stopped importing oil from Iran, and thus oil companies have stopped depositing money to the designated banks

The coronavirus scare has led to a near-standstill of trade between India and Iran.
 
Apart from exporters, the two lending entities — UCO Bank and IDBI Bank — which enable the payment mechanism for this bilateral trade, will also be hit, since they will lose on a pool of low-cost deposits. A top official of UCO Bank said the deposits on account of the special mechanism put in place for trade with Iran had already substantially reduced — the bank would be able to extend the support till funds were available.
 
This is a double whammy for exporters, struggling with a drastic fall in trade with Iran over the past month due to acute shortage of containers, largely supplied from China (which accounts for nearly 30 per cent of container supply worldwide).

 

For the banks, if both export and import get halted, the payment mechanism will turn redundant. The two banks did not reveal the extent of deposits on account of the Iran trade. However, its utility can be gauged from the fact that in the final quarter of 2018-19, UCO Bank could trim its loss by 27 per cent since it got Rs 13,000-14,000 crore of an interest-free floating fund from Indian oil refiners.
 
In the wake of US sanctions on Iran, India cannot engage in dollar-denominated trade there. Hence, a rupee-rial trade mechanism has been put in place. Under which, oil refineries from India deposit rupees in designated banks for import from Iran; the fund is used to clear dues to exporters from India to Iran.

 
However, for about six months, India has stopped importing oil from Iran. So, oil companies have stopped depositing money to the designated banks.
 
Although, export had not proportionally fallen. 
 
According to government data, our import from Iran was nearly $13 billion in 2018-19; this had come down to $1.35 billion in the first 10 months (April 2019-January 2020) of the ongoing financial year. In contrast, the fall in export was much less. From $3.5 billion in 2018-19, it was $2.8 billion this financial year, in April-January.
 
Rice, tea, sugar and pharmaceutical products are key products exported from India to Iran. Rice has the largest share. Vinod Kaul, executive director of the All India Rice Exporters Association, says the segment’s trade with Iran has nearly stopped with the acute shortage of containers. Last year, India exported about 1.4 million tonnes of rice to Iran. This financial year, says Kaul, it will not be more than a million tonnes.

 
Tea exporters to Iran also say shipment has frozen on account on unavailability of containers; also, due to shipping companies being unwilling to send consignments there. “More Iranians are not able to come here to place forward orders; neither can we go to Iran to sign a deal. This crucial market is expected to be hit severely this year,” said a tea estate owner from Assam.
 
Usually February-April is a major season for tea companies, as forward contracts are signed during this period. Based on these contracts, where prices and export volume are negotiated, companies plan the season’s harvest.

 
Between June and December 2019, Indian exporters to Iran faced huge delays in repayment, amounting to about Rs 2,000 crore. The dues were later cleared on government intervention.