With Iran sanctions set to be lifted, UCO Bank braces up for hit in margin

The bank is set to lose out on interest-free deposits of around Rs 15,000 cr: around 8% of its deposits

With sanctions on Iran expected to be lifted over the next few months, UCO Bank is bracing for a hit on margins. To offset the setback, the bank has launched an aggressive campaign to mobilise low cost CASA deposits. The bank is set to lose out interest-free deposits of around Rs 15,000 crore, which is around 8 per cent of its total deposits, once trade with Iran resumes in dollar denomination.

In 2012, after US imposed sanctions on Iran, UCO Bank started a new rupee trade mechanism through which 45 per cent of oil imports of Indian oil companies are settled in rupee denomination-the only bank to do so. Under the mechanism, a few Iranian banks have opened Indian Rupee accounts with UCO Bank. The payments towards imports of crude oil are paid by the Indian oil companies to these accounts. The payments towards exports of goods from India to Iran are paid from these accounts. The mechanism became operational in February 2012, and since then all trade with Iran is routed through UCO Bank.

"It will take little time for the lifting of sanctions to take place. It is certainly will certainly be a hit, and we are trying to make it good by aggressively increasingly our CASA account," said Charan Singh, Executive Director, UCO Bank.

Already falling crude prices have been a cause of concern for bank. At present, the deposits in the Iran accounts at UCO Bank are close to Rs 15000 crore, against a peak of nearly 23000-25000 crore.

Announcing the financial results for Q4 of FY15 in May this year, Arun Kaul, former chairman and managing director UCO Bank, had mentioned that apart from high NPAs, falling Iran deposits as one of the reasons for low profit. According to Kaul, from a peak of around 23000 crore, the Iran deposits had come down to about Rs 17,000 crore around May 2015. The bank had reported nearly 26 per cent fall in net profit in Q4 FY15 at Rs 209 crore, against Rs 285 crore in the fourth quarter of FY14.

In the last quarter (ended June 2015), the bank registered a muted 3.12 per cent growth in deposits over last year, mainly on account of a drop of nearly Rs 3100 crore in Iranian Vostro account deposits. The bank's net interest margin in the quarter had dropped to nearly 2.40 per cent, against 2.72 per cent at the end of June 2015.

Beginning the financial year 2012-13, till May 2015, gross payment received by the bank from oil importing companies of India (45% component) was about Rs 81,858 crore, while the payments made to Indian exporters by the bank was close to Rs 66,604 crore, according to a data available with the bank.

In 2014-15, India's total exports to Iran were valued at $ 4,175 million, a rise of nearly 25 per cent in 2012-13. However, compared to 2013-14, Indian exports to Iran were down by nearly 16.2 per cent, mainly on account of lower agri-exports.

At the end of June 2015, the share of CASA accounts in bank's total deposit was around 31.71 per cent.