India opts for rupee payment for Iran oil; UCO Bank reluctant to route fund

The Union government on Friday decided to settle payments for Iranian oil in rupee through the Mumbai branch of an Iranian bank. This comes close on the heels of the Kolkata-based UCO Bank expressing reservation in facilitating the payment to Iran, even as the finance ministry rejected the proposal to use IDBI for such transactions.

The decision to make payment in rupee instead of dollar was taken after a meeting of an empowered group of ministers headed by finance minister Arun Jaitley on Thursday. India cannot use the existing payment mechanism since the United States under Donald Trump has opted for the renewal of sanctions on Iran, which will affect the banking sector and oil payments from November 4. 

The Trump administration had withdrawn from a nuclear accord signed by Barack Obama in the month of May and had ordered first round of sanctions on Iran from August 6.

At present, Indian companies are using Euro payment mechanism of the State Bank of India and Germany-based Europaeisch-Iranische Handelsbank AG. Currently, state-run companies like Mangalore Refinery and Petrochemicals Ltd (MRPL), Indian Oil Corporation (IOC) and Hindustan Petroleum Corporation Ltd (HPCL) contribute a larger chunk of Iran crude oil imports. On the other hand, Nayara Energy may also be impacted by the sanctions as 40 per cent its crude oil requirement comes from Iran. Nayara Energy earlier called Essar Oil is now owned by Russian major Rosneft.

“UCO Bank has shown reservations in resuming the old payment channel, while the finance ministry is not in favour of using IDBI,” said an official close to the development. RK Takkar, chairman and managing director, UCO Bank, did not respond to queries from Business Standard. During the previous sanctions, India used to make payments through Ankara-based Halk Bank and UCO Bank. 

In today’s meeting — attended by Jaitley, Foreign Minister Sushma Swaraj and Road Minister Nitin Gadkari — it was decided to start importing crude oil from the Chabahar port in Iran.

With India taking a final call on continuing with crude oil imports, a bilateral meeting between India and Iran is likely to take place by the end of this month.

The payment mechanism may also go for a change as the country may have to go back to the old cost, insurance and freight (CIF) basis, instead of a free-on-board (FOB) mode followed prior to the sanctions. Under CIF, the exporter will incur the costs and pays freight and insurance charges as against the FOB route where the buyer charters a vessel to ship crude.

When asked about the decision by the government, HPCL chairman and managing director M K Surana said all the possible options might be under consideration of the government to continue Iran payment. “We are yet to get any official confirmation regarding what options we will have to take,” he said. On an annual basis, the bilateral trade between India and Iran comes to around $13 billion, out of which $9 billion is oil imports from Iran only.

Meanwhile, a Reuters report said that India’s Chennai Petroleum will stop processing Iranian crude oil from October to keep its insurance coverage once new sanctions against Iran go into effect. Interestingly, a trading arm for state-owned National Iranian Oil Co, owns a 15.4 percent stake in Chennai Petroleum.