Rupee payment snags in Indo-Iran trade

Receiving payments from Iran for shipments of Indian commodities against formal contracts can be a nerve-wracking experience for the shippers. This is despite compliance with irrevocable letter of credit (LC) received through UCO Bank — nominated by the Indian side for transacting trade in rupees.

Lack of awareness of Iranian banking system, their shifting trade priorities; impact of US sanctions; extreme volatility in exchange rates of rials and infirmity in the rupee payment arrangements of UCO Bank are some of the concerns faced by both countries. The RBI may scrutinise the glitches before major outstanding dues increase substantially, especially because of sustained pressure generated by the US trade embargo on Iran.

Traders who earlier benefited by exploiting business opportunities in Iran increased their exposure — only to realise that their profits evaporated in the subsequent deals due to massive delays in remittances spread over three-six months. In January 2012, Iran agreed to accept 45 per cent payment of crude oil in rupees, out of the $12-billion annual import. The balance 55 per cent is paid to Iran through other channels of free foreign exchange — via Turkish banks, for instance. The rupee equivalent of $5 billion or Rs 30,000 crore is to be deposited with UCO Bank annually in the account of Bank Markazi — the central bank of Iran. Four Iranian banks — Bank Parsian, Saman Bank, Pasargad bank and EN Bank — have been authorised to utilise these rupee funds. Indian exporters can claim rupee payments from UCO Bank against LCs opened by these Iranian private banks after receiving their specific authorisations. The Gulf country can also remit 100 per cent advance payment but such cases are rare.

Operational hurdles

The bilateral agreement is meant to balance the interest of both sides. It gives India the flexibility of partial rupee payments, while simultaneously providing access to Iran to buy vital agro and other essential goods for which sanctions may be hurting them. The Dubai route for effecting Indian payments — which was the preferred channel for the last few years — has now been blocked by US’ effective policing on UAE’s banking system. Payments of 1121 variety parboiled rice, tea, corn, sugar and soymeal from Iran have been circumvented from Dubai to UCO Bank. Iran also intends to follow the same mechanism for potential supplies of wheat from India.

The operational protocol is replete with many loose ends on Iranian and Indian sides. The first snag is the considerable delay in establishing rupee LC even though 120 per cent payment in equivalent rials is made by the local buyer to the opening bank. The Iranian importer is put in a “queue” without assigning any reason, or without indicating any timeframe for transmission of documentary credit. The Indian seller, in anticipation of receipt of LC, invests funds for procurement and dispatches cargo to the load port — knowing fully well that either the LC may not be received on time or the buyer may withdraw request for establishing the LC due to decline in prices or the seller itself unwilling to ship due to upward price swing. This is akin to playing dice of “head or tail”. Indeed, a precipitous predicament. If documents are sent on “collection” basis through UCO Bank, the situation can worsen.

The second hurdle arises when the Iranian importer has to provide evidence for receipt of shipped goods at the discharge port by furnishing a “green” slip to the Iranian LC opening bank. Remittances are again assigned in a “queue” where randomness rules with procrastination. Payments to all shippers get stuck or trickle as micro instalments.

The third problem: UCO Bank is unable to provide any relief by effecting payment. It simply acts as a courier and debiting agent of Iranian banks. How can the RBI/ Indian Government accept a situation wherein goods have left Indian shores against valid LCs, and the title stands transferred to Iranian buyers, but disbursal of funds in India is held up from the Iranian banks for an unknown period.

Cross rate predicament

All duty drawback benefits for exports and facility of ‘no withholding tax’ are applicable to this rupee account. The Indian side has treated Iranian trade at par with hard currency. Notwithstanding these facts, the fourth lacuna is that UCO bank is not authorised to negotiate LCs at sight as per international UCP (Uniform Customs and Practices for documentary credits) norms, while holding the funds as a trustee of Bank Markazi. Reason: Export Credit Guarantee Corporation (ECGC) is not covering risk of UCO bank transactions with Iran and, therefore, LCs cannot be paid at sight. When surplus Iranian funds are “trusted” with UCO bank, why can’t the credit cover be granted? The Ministry of Commerce can intervene with ECGC for compliance.

Despite US sanctions and political hostilities, the dollar still remains the dominant currency for determination of intrinsic value in local rials by Iranian banks. The fixation of cross rate between rials and rupees is perhaps the predicament with Iranian banks for debiting the importer.

Unless these ambiguities and uncertainties are resolved, sellers will add more “risk” premium in dealing with Iran. Prices will be skewed and that will make Iranian importers circumspect of Indian values. Such a state of affairs is negative for both sides as “prices will be inflated for procedural delays” when these can be easily compressed within internationally recognised window of 5-21 days.

In a volatile trading environment, these complications can strain the trade with claims and counterclaims, with no imminent possibility of settlement. Both Governments and their central banks must engage themselves in mutual consultation for smooth trade under rupee payments.

(The author is a grains trade analyst.)

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