Nearly three months after the Reserve Bank of India (RBI) put in place a mechanism to settle international trade in rupees, only two Indian banks – Uco Bank and Yes Bank – have opened special Vostro accounts to facilitate the process. Other Indian banks, including State Bank of India (SBI), the largest in the country, are yet to initiate the process amid fears that any financial transaction with Russia may attract sanctions from the US.
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Though banks claim that they are still waiting for clearances from the RBI, the rupee trade is yet to kickstart for all practical purposes. The trade with Russia is done more at the country level and bulk of the business relates to oil imports with exports falling after the Ukraine war started. “For banks, the US is more important than Russia. Banks get most businesses from their US operations as compared to Russia. Banks don’t want to be on the wrong side of the US as they fear that any agreement with a Russian bank for rupee trade may attract sanctions on them also (from the US),” said an official of a nationalised bank who preferred anonymity.
When contacted, the official of a bank said, “all banks are getting into a pact but there is some reluctance from those lenders who have overseas operations, especially in the US and Euro zone.” As trade with Russia is less than two per cent of the total trade, the thinking among bankers is that why should they invite sanctions and put their operations at risk for a small business with Russia.
Bankers, the RBI and the Finance Ministry officials had a meeting last month to thrash out various issues faced by the banks wherein the government offered full support to banks and allayed fears about sanctions. Despite the push from the Finance and External Affairs Ministries, banks, especially larger ones, are slow to respond to the cues.
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Although A Shaktivel, President of the Federation of Indian Export Organisations (FIEO), recently said SBI has come forward for facilitation of rupee trade with Russia, SBI is yet to make any announcement on this front. SBI did not respond to the mail sent by The Indian Express. “We’re expecting the government to come out with a standard operating procedure to deal with the issues arising from the rupee trade,” said an official of FIEO.
UCO, Yes Bank opened Vostro accounts
Only two Indian banks — Uco Bank and Yes Bank — have opened special Vostro accounts to facilitate the process. Other Indian banks, including State Bank of India, are yet to initiate the process.
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On the other hand, the RBI has said the rupee trade mechanism has got a good response. “The responses have been fairly good but since the process involves a lot of vetting at the level of the government, the central bank and banks, the initial process is taking some time. We have received responses from many countries,” RBI Deputy Governor T Rabi Sankar said during the last post policy conference.
Without mentioning any country’s name, Sankar said that the RBI has received responses from 4-5 countries. Bankers who spoke to The Indian Express said there is no delay in the process. “As and when Indian banks are getting applications from other country banks for opening special rupee vostro accounts, they are scrutinising it and applying to the RBI,” said a banking source.
A vostro account is an account a correspondent bank holds on behalf of another bank.
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“The RBI has given permission to the UCO Bank and it will allow others also. It is a long-term process. Once approval is received, a special vostro account will be opened, and then the trade will take place through that account. Besides Russian banks, there are lenders from other countries also who have applied for the special vostro account. Around 120 entities have applied,” said an official. Uco Bank functioned as the official payment bank for oil imports from Iran when it faced severe sanctions from Western countries.
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On July 11, the RBI put in place a mechanism to settle international trade in rupees “in order to promote growth of global trade with emphasis on exports from India and to support the increasing interest of the global trading community in the rupee”. The central bank’s move has come in the wake of increasing pressure on the Indian currency in the wake of Russia’s invasion of Ukraine and sanctions by the US and the EU.
The RBI mechanism is expected to facilitate importers and exporters to avoid rules that prevent the use of a global currency such as the US dollar for trade with certain countries. After Russia attacked Ukraine, several countries had imposed sanctions on Russia. Indian companies which were looking for alternative modes of payment for imports can make use of the new mechanism.
In a circular issued to commercial banks, the RBI said all exports and imports under this arrangement may be denominated and invoiced in rupee.
According to the central bank, AD (authorised dealer) banks in India have been permitted to open rupee Vostro accounts. Accordingly, for settlement of trade transactions with any country, AD bank in India may open special rupee vostro accounts of correspondent banks of the partner trading country.
What worries bankers is the imbalance in the Indo-Russia trade. India’s exports to Russia crashed to just over $0.4 billion while imports zoomed to almost $9.3 billion in the first quarter ended June 2022. In the April-August period, the value of all petroleum products imported from Russia jumped to $13.7 billion as against $1.7 billion in the same period of last year. While oil imports are done through public sector oil companies, banks are skeptical about putting their business interest at stake for the plummeting exports to Russia.
Several Russian banks have opened their representative offices/ branches in India. These include VTB, Sberbank, Vnesheconombank, Promsvazbank and Gazprombank. Similarly, the Commercial Bank of India LLC (joint venture of SBI and Canara Bank) is providing banking services in Russia.
