Lenders seek RBI's guidance as OFAC restricts payments via ACU mechanism

US Office of Foreign Assets Control advises banks to halt ACU-related payments, raising concerns for India's trade settlement with ACU nations

Indian banks have reached out to the Reserve Bank of India (RBI) for guidance following a directive from the US Office of Foreign Assets Control (OFAC). This directive instructs banks in the United States to cease processing payments associated with the Asian Clearing Union (ACU) mechanism, according to a report by The Economic Times (ET).

 

The ACU was established in 1974 to enable regional cooperation, economise on foreign exchange reserves, and promote trade among its members. Alongside India, ACU members also include Bangladesh, Bhutan, Iran, the Maldives, Myanmar, Nepal, Pakistan and Sri Lanka.

 

A senior banking executive explained the implications of this decision to ET. They said the move by OFAC meant that settlements via foreign banks in US dollars under the ACU umbrella would no longer be possible. "There is an issue related to the location of the ACU's headquarters. We understand that OFAC has instructed all US correspondent banks to stop processing payments," they said.

 

However, earlier this year, the ACU had already reached a consensus to settle in local currencies to reduce reliance on the US dollar and the euro. In June, it was ascertained that India would most likely lead the settlement of trades in the ACU, according to a report by the Times of India.

 

Nonetheless, the advisory from the US Financial Intelligence Agency could have significant implications for India's trade settlements with ACU member countries, particularly Bangladesh and Iran. The report also states that India controls nearly 93 per cent of the ACU's credit positions.

 

Earlier this month, Indian lenders sought the RBI's intervention, seeking clarity and solutions for payment processing without an alternative mechanism for settling trades with ACU members.

 

In 2022, an Inter-Departmental Group of the RBI explored the internationalisation of the rupee and proposed using local currencies by ACU members for transaction settlements. The idea of including the Indian rupee as one of the settlement currencies under the ACU was also suggested.

The situation remains fluid, and stakeholders actively seek solutions to ensure smooth trade and financial transactions among ACU member nations.