Sources said the large Indian lender is reluctant to process rupee trade transactions with Russia directly, as the mechanism was put in place for fear of Ukraine becoming a target of sanctions by the United States and Europe over the invasion.
The Reserve Bank of India (RBI) said in July that it had put in place a system of international trade settlement in Indian rupees with immediate effect, after two small lenders have moved to adopt the system.
But large lenders with greater exposure to the international financial system, and especially the dollar, are concerned that their businesses could be disrupted if targeted by sanctions.
Western sanctions are trying to limit Moscow’s access to foreign currency, particularly the dollar, to punish Russia for its invasion of Ukraine. India has deep trade ties with Russia, and the rupee mechanism can help bypass the settlement of the US dollar and the euro.
An Indian diplomat in Russia said that Russian banks had approached eight major Indian counterparts to set up a rupee trade agreement, but Indian banks did not respond.
Some of these banks include India’s largest lender State Bank of India, Punjab National Bank, Bank of India, Bank of Baroda and Central Bank of India.
None of these banks responded to e-mail requests seeking comment.
But several sources in the banks privately confirmed that they have decided not to use the structure, at least for now.
One of them, a senior executive of a large state-owned bank, said using such a settlement mechanism could be in violation of certain sanctions rules. “They (Western countries) can impose sanctions on us, it will be a big business and loss of reputation,” the banker said.
Indian banks continue to settle trade with non-sanctioned Russian entities in dollars or euros, but sources said they believe settlements in rupees could come under more scrutiny.
Another banker said the new settlement system could raise questions in the West and lead to sanctions. “The process to lift them can take months and is a risk that banks are not willing to take,” the source said.
The United States imposed sanctions on major Russian banks, other institutions, President Vladimir Putin and oligarchs following the invasion of Ukraine, and anyone dealing with a sanctioned entity could attract sanctions.
A third source at a large Indian bank said the lack of liquidity in trading in the ruble against the more liquid rupee made it difficult to determine an accurate ruble-rupee exchange rate, another factor holding back Indian banks.
Even if they managed to remove that hurdle, what could Russian banks do with the pool of rupees sitting in an account in India, the source asked. Indian banks do not have large reserves of ruble, so they cannot offer direct currency exchange.
Two smaller Indian banks that have initiated the process of opening accounts with Russia to settle rupee business are private lender Yes Bank and state-owned lender UCO Bank.
The diplomatic source said that Yes Bank has tied up with PSCB Bank in St Petersburg. UCO Bank has received RBI approval to open a special rupee account for Russia’s Gazprombank, and its chief executive Soma Shankar Prasad told Reuters last month that it expects to do so soon.
Yes Bank, UCO Bank, Indian Banks’ Association and the Indian finance ministry did not respond to emails seeking comment.
According to government data, India’s imports from Russia touched $17.24 billion in April-August this fiscal, from about $3.2 billion a year ago due to a sharp increase in oil purchases.
Indian exports to Russia declined to $992.73 million in April-August from $1.31 billion in the same period last year.
(Except for the title, this story has not been edited by NDTV staff and is published from a syndicated feed.)