Renewed US sanctions on Iran’s oil exports are giving a boost to the profits of one of India’s smaller state-owned banks, which has been struggling under the weight of a mountain of bad loans.
Kolkata-based UCO Bank expects its privileged status processing refiners’ payments for Iranian oil shipments to add more than $110 million to annual earnings, according to Chief Executive Officer Atul Kumar Goel. Indian refiners are required to deposit any money destined for Iran without interest with UCO Bank during periods when US sanctions are in force.
“Being involved in the country’s oil imports from Iran gives us access to zero-interest funds, which refiners place with us,” said Goel. “It will improve our net interest income as well as operating profit.”
Limited global presence
UCO Bank was first designated by India’s government as the payment bank for Iranian oil in 2012, as the US tightened an earlier round of sanctions in an effort to get Iran to accept controls on its nuclear programme.
The bank was chosen because of its limited international presence, which made it less vulnerable to any repercussions from its involvement in the oil trade, processed in euros and rupees to avoid exposure to the US banking system.
Those sanctions were lifted in 2015, leading to a drop in UCO Bank’s profits as other Indian banks entered the business. But the lender has resumed its former privileged role as US President Donald Trump pulled out of the 2015 nuclear deal last year and started reimposing penalties.
India was one of eight countries benefiting from a US waiver, allowing it to import nine million barrels of Iranian oil a month until April. UCO Bank, which was chosen by the government to pay for the imports during the waiver, said it started receiving the funds to pay for these shipments earlier this year and now has a steady float of more than ₹10,000 crore.
“Money from refiners has started coming in from January and we are making payments on a daily basis to exporters,” said Goel. “The bank is paying out more than one billion rupees a day for the oil,” he added.
The boost to earnings from the interest-free float may bolster the bank’s efforts to come out of a so-called Prompt Corrective Action plan – under which lenders are restricted from making loans while they mend balance sheets – which was imposed by the Reserve Bank of India.
UCO Bank will also get an injection of about ₹3,300 crore by March 31 to strengthen its risk buffers, as part of the government’s capital infusion plan announced on Wednesday.
As much as a quarter of UCO Bank’s loan book had soured as of December 31, though Goel said he does not expect that to increase in coming quarters.