Government Dials Banks For Rupee Settlement Mechanism

The government has called top bankers for a meeting on Wednesday to understand why they haven't actively taken up the mechanism for rupee settlement in international trade.

The meeting will be attended by officials from the Department of Financial Services, senior management from major public and private sector banks, as well representatives from the banking regulator, according to two bankers in the know.

The call for a meeting follows a communication from the Reserve Bank of India asking banks the same question, the bankers confirmed.

The Economic Times newspaper first reported on Wednesday that bankers had been called for a meeting with government officials and the RBI for the rupee settlement mechanism for international trade.

On July 11, the RBI had introduced the rupee settlement scheme.

Under the mechanism, Indian importers were allowed to make payments in rupee, which would be credited into the special vostro account of the correspondent bank of the partner country, against the invoices for the supply of goods or services from the overseas seller/supplier.

Indian exporters, undertaking exports of goods and services through this mechanism, were allowed to be paid the export proceeds in Indian rupee from the balances in the designated special vostro account of the correspondent bank of the partner country.

While the regulator had then said the mechanism was to promote global trade and support the interest of the global trading community in Indian rupee, bankers had widely seen this as a way to support trades with Russian firms. It would especially help India pay for Russian oil in rupees, experts had noted.

After the start of the Ukranian war, major developed economies had moved to remove Russia from the SWIFT network, which allows international trade settlements. The United States Department of Treasury had also placed sanctions on Russia.

Most major banks have kept away from the mechanism because it could lead to sanctions from the U.S., the first of the two bankers quoted above said. While it is understandable that the government and the RBI would like banks to use this route, there is little they can do to address potential sanctions, this banker said.

For large Indian banks with international presence, these sanctions could be very detrimental, the second banker quoted above said.

Queries emailed to the RBI and the finance ministry sent on Wednesday were not responded to immediately.

To be sure, India has previously traded with countries facing U.S. sanctions. After the U.S. sanctioned on Iran, India had developed a special trade arrangement using UCO Bank as a nodal bank. Owing to the Kolkata-based lender’s lack of international presence, it escaped sanctions.

According the commerce ministry data released last week, India's exports fell 1.15% year-on-year to $33 billion in August even as imports rose 37% over the year ago to $61.68 billion. That pegged the trade deficit at $28.68 billion.