With the road now clear for direct banking relations between Iran and India after the lifting of global sanctions on the former, finance costs are expected to decline for bilateral trade, business and retail transactions.
Public sector bank executives said it will take a while to establish a direct presence there. In the near term, Indian banks will assess the capacity of branches in America to handle dollar-denominated transactions with Iran.
A senior State Bank of India (SBI) executive said Iran-linked transactions had hitherto involved much time and processing, raising the cost for the parties involved. Dollar transactions should cut this but would need trained personnel and technology at US branches. "We will seek the status on capacity to handle volumes for India-Iran transactions," he said.
Indian banks had correspondent banking relations with Iranian counterparts before sanctions were imposed and these would have to be renegotiated before resuming the relationship, another SBI executive said.
Kolkata-based UCO Bank said it could lose a substantial amount of interest-free deposits from the end of sanctions, impacting its margins. In early 2012, after the US imposed sanctions on Iran, the bank started a new rupee trade mechanism, through which 45 per cent of the imports from Iran of Indian oil companies were settled in rupees, the only bank to do so. Under the mechanism, a few Iranian banks had opened rupee accounts with UCO Bank. The payments towards import of crude oil were paid by the Indian companies to these accounts. And, payments towards export of goods from India were also paid from these accounts. After the mechanism became operational for oil, all trade with Iran was routed through UCO Bank.
So far, it has not been told by the government or the Reserve Bank of India to stop the rupee trade mechanism. As of now, the bank has a pool of interest-free deposits of around Rs 12,000 crore from Iranian accounts, six per cent of its total deposits.
In fact, deposits from Iranian accounts had been falling over the past six months, when the US announced the move towards lifting of sanctions. At the peak, Iranian deposits at UCO Bank were Rs 23,000 crore.