The Coronavirus scare has led to a near standstill of trade between India and Iran. Apart from exporters, UCO Bank and IDBI Bank, the two banks which support payment mechanism for bilateral trade between India and Iran, also stand to be impacted, as they lose out on a pool of low cost deposits.
According to a top official of UCO Bank, the deposits on account of special mechanism put in place for trade with Iran has substantially reduced and the bank would be able to support it till the funds are available.
This is a double whammy for exporters who had been struggling with drastic fall in trade with Iran over the past one month due to acute shortage of containers, which is largely supplied from China. For banks, if both exports and imports come to a standstill, the payment mechanism would turn redundant.
While the banks did not reveal the extent of deposits on account of Iran trade, its utility can be gauged from the fact that in Q4 of FY 19, UCO Bank could trim loss by 27 per cent as the bank gained Rs 13000-Rs 14000 crore of interest free floating fund from Indian oil refiners.
In the wake of US sanctions on Iran, India cannot engage in dollar-denominated trade with Iran. Hence, a special rupee-rial trade mechanism has been put in place, under which oil refineries from India deposit rupee in designated banks for oil imports from Iran, and the fund is used to clear dues of exporters from India to Iran.
For about last six months, India has stopped importing oil from Iran, and thus oil companies have stopped depositing money to the designated banks.
However, even though the oil imports had dried up, exports had commensurately not fallen.
According to government data, India’s import to Iran stood at nearly $ 13 billion in 2018-19, which came down to nearly $ 1.35 billion this financial year between April-January. In contrast, the fall in exports was much less. India’s exports to Iran stood at $3.5 billion in 2018-19, which stood at $2.80 billion this financial year between April-January.
Rice, tea, sugar and pharmaceutical products are key products exported from India to Iran, with rice accounting for largest share.
According to Vinod Kaul, executive director of All India Rice Exporters Association, the rice trade to Iran has come to near standstill, as there is an acute shortage of containers, and Iran has been focusing of exporting other essential items like over agri-commodities.
China accounts for nearly 30 per cent of containers supply worldwide.
Last year, India exported about 1.4 million tonne of rice to Iran. According to Kaul, this year, the yearly exports will not be more than one million tonne.
Tea exporters to Iran also say exports to Iran has frozen on account on unavailability of containers and shipping companies unwilling to send shipments to Iran.
“Moreover, Iranians are not able to come here to place forward orders and neither can we go to Iran to sign a deal. This crucial market is expected to be hit severely this year”, a tea estate owner from Assam said.
Usually February-April is a major season for the tea companies as forward contracts are signed during this period. Based on these contracts, where prices and the export volume are negotiated, tea companies plan the season’s harvest.
Notably, earlier, between June and December, Indian exporters to Iran faced huge delays in repayment, amounting to about Rs 2000 crore. The dues were later cleared on government-level intervention.