As India pushes to make rupee international, UCO Bank is in a sweet spot

State-owned lender aims to use its experience in facilitating trade with Iran

The rupee-rial mechanism for trade between India and Iraq is more than a decade old now and it has taught UCO Bank a lot. When India, in 2012, proposed buying Iranian oil in rupees, the Kolkata-headquartered bank put up its hand.

When the Reserve Bank of India (RBI) in July allowed 20 domestic banks to open special rupee vostro accounts (SRVA) with partners in 22 countries, including Russia, that learning has come in useful. One lesson is that monies in SRVA should be allowed to be invested in Indian government securities.

It is possible that it is for this reason that state-owned UCO, which has a balance sheet of $65 billion, sits alongside industry heavyweights in a working group set up by the Indian Banks Association (IBA), an umbrella group, to advice the RBI on how to make the rupee acceptable in foreign countries. State Bank of India, the country’s largest lender that has a balance sheet of $750 billion, is a member of the group too.

“The key problem in making these cross-border transactions work has remained unchanged. If India has a trade deficit with a country, how is one to make that country interested in running up a balance of Indian rupees?” said a government official.

UCO’s Mumbai office runs about 10 Iranian accounts that have worked well. The bank plans to expand its presence to the Russian market, said Ashwani Kumar, chairman of UCO. “We offer two types of services to international traders: That of advisory, or as transaction partners, to deal with such countries.”

UCO was among the 14 banks nationalised by Indira Gandhi in 1969, who was the Prime Minister then. It lost big customer accounts as business slipped out of Kolkata and reached its nadir in the 1990s. The M S Verma committee on restructuring weak public sector banks identified UCO, United Bank of India, and Indian Bank as the worst. The latter two walked the merger route in 2020 but UCO was kept distinct for its role in the rupee trade. It also helped that UCO had just two overseas branches, in Singapore and Hong Kong, mostly catering to the Indian diasporas.

When Iran was yanked off the Asian Clearing Union in 2011 as part of United Nations (UN) sanctions, the dealing rooms of banks struggled to settle trade between countries and RBI faced a problem. Oil bills from Iran could not be settled in dollars beyond a limit. India did not export much to Iran, so there was hardly any inflow of rial. But Iranian oil imports, India’s chief source then, had to be paid for in rial.

UCO was at that time led by Arun Kaul, a former head of treasury operations at Punjab National Bank. He sensed an opportunity and rounded up UCO Bank officers to work out alternatives. One of his officers recalled traveling late into the night to UCO’s treasury operations offices in the Fort area of Mumbai. “We did not regard our jobs as routine; it was great to find solutions that would be legal,” said one of those involved then. (Years later, Kaul was arraigned by the Central Bureau of Investigation in an alleged fraud case that is unrelated to these developments.)

The rupee trade arrangement UCO worked out was profitable for the bank and within the rules of the sanctions. Iran’s state-owned oil company started accepting payment in rupees for oil sold to India. Rupee would be deposited in an account maintained by the Iranian central bank, Bank Markazi, which would release rial to local exporters. This implied Markazi had to carry the exchange risk for the rupee.

The arrangement almost ruptured a year later when India became part of the “fragile five” in 2013 and the value of the rupee plummeted. Iran stopped exporting oil and taking payment in Indian rupees. It took several years for relations between the two countries to mend. As the Indian rupee has stabilised and the value of rial has plummeted, Iran has become amenable.

Rupee, rial trade in practice

If an Indian entity, say MRPL, imports crude from Iran, it would have had no problem if it paid for the consignment in dollars. The sum can be monitored by the US Treasury, which keeps a limit on how much crude can be sold under the sanctions.

But a rupee payment will not be acceptable through this route. To do that MRPL would have to open an account with UCO Bank. Likewise the exporter of crude, an Iranian company, also opens an account with an Indian bank, often UCO.

The rupee payment from the Indian importer is transferred to the account of the Iranian oil company, which then transfers the sum to itself in Iran. An Iranian bank will purchase the rupee from the oil company and give it rial. The rate depends on the underlying exchange rate between the two currencies, unsurprisingly denominated in US dollars. The Iranian bank buys rial from Bank Markazi by paying in Indian rupee.

The Indian currency now enters the balance sheet of Bank Markazi, which holds the sum partly as reserve and to pay for demand from other Iranian companies for rupee to pay for imports. There is now a sizable quantity of items Iran buys from India. In any case there is now often a vast unmet demand for forex (in December last year it changed the Governor of the Bank when the crisis became acute). So Bank Markazi is now willing to hold good sums of Indian rupee as reserves too. The mutual balance has made it easy for RBI to keep Iran out of the ambit of the SVRA facility.

At UCO Bank’s headquarters in BTM Sarani, better known by its former name of Brabourne Road, in central Kolkata’s business district, officials see RBI’s moves for the internationalisation of the rupee as a great opportunity. The 22 countries permitted to open SRVA facilities with Indian banks include Bangladesh, Sri Lanka, Belarus, Botswana, Malaysia and Maldives. Many of these countries, UCO reckons, will need help to make use of the larger role of rupee. It only needs India to have a trade surplus with a country, like Bangladesh and Sri Lanka do.

Entities from these countries can invest in government of India bonds as of now if they open a SRVA instead of being restricted to pay only for trade as a usual vostro account would mandate. The market expects RBI to allow the balance in these accounts for more creative uses, which is what the IBA committee is expected to suggest. Having built up the experience of helping Iran and then Russia to use their rupee balance to earn income, UCO Bank expects more business from new nations to use its expertise.