Sanctions against Russia: The RBI and banks meet to plan a strategy

The Reserve Bank of India (RBI) is expected to assess the situation resulting from the US and other nations’ sanctions against Russia and devise appropriate steps for commercial banks to follow in the coming days. The impact of the sanctions on Indian banks has already been considered by members of the Indian Banks’ Association. Officials from the Finance Ministry are also keeping a close eye on the situation and are in contact with the RBI and other major lenders.

SBI and other banks have previously stated that they will not handle any transactions with Russian firms that are subject to international sanctions imposed after Russia’s invasion of Ukraine. Current transactions will not be disrupted, but new transactions will be put on hold, according to banking sources. Pharmaceutical products, tea, and coffee were among the $3.33 billion worth of goods India sold to Russia in 2021. SBI declined to comment on the developments when approached.

According to government sources, geopolitical developments would have an impact on India’s import basket, and it may be necessary to diversify the sources of certain commodities’ imports, particularly petroleum goods and agricultural commodities. However, despite the difficulty of trading in both US dollars and Euros, the impact of sanctions on payment movement between Russia and India appears to be “manageable” at the moment, according to insiders. This is because there is always the possibility of executing transactions in rupees, as was done when Iran was sanctioned.

RBI could use the Rupee account method with Russia

Trade with Iran was conducted through a rupee account with UCO Bank, with Indian importers depositing rupee payments in Iranian banks’ Vostro accounts for oil imports. Indian exporters utilized a similar mechanism to get payments for Iran. According to sources, the same type of transaction method might be used in this scenario as well. However, the major source of concern appears to be a dramatic increase in commodity prices, particularly oil and gas, as a result of the geopolitical issue, which is projected to have a substantial impact on the Indian economy.

For commerce with Russia, there is also talk of reviving the rupee payment system. The Reserve Bank of India, on the other hand, would have to deal with the impact of increased crude oil prices on retail inflation. The increased surge in international crude oil prices, according to RBI Governor Shaktikanta Das, will require constant monitoring because it poses a risk to local inflation.

Meanwhile, Commercial Indo Bank LLC, the lone Indian bank operating in Russia, is gaining attention since it is the principal agent of the supporting organizations – State Bank of India and Canara Bank – that undertake operations with Indian enterprises doing business in Russia. SBI has a 60% shareholding in the bank, while Canara Bank has a 40% stake. The impact of the sanctions on Commercial Indo Bank, on the other hand, remains unclear.

Corporate deposits and interbank loans are among the bank’s liabilities, according to ACRA. The reliance on the largest depositors is relatively substantial, with the top 10 customers accounting for 38 percent of total liabilities and the largest depositors for 84 percent. “The Republic of India’s embassy is the largest creditor, and ACRA feels that the Bank’s relationship with this depositor is extremely predictable,” it stated.

The bank’s loan portfolio accounted for 6% of its assets as of March 1, 2021. Russian government bonds and financial assets owned by the Bank of Russia make up the majority of the assets. As of June 30, 2020, there were no issue loans (Stage 3 under IFRS9) in the bank’s loan book, according to ACRA. As of June 30, 2020, the guarantees portfolio was valued at RUB 247 million. According to the bank, its strategy comprises organic loan book development, mortgage lending expansion, and a bigger volume of guarantees granted on government contracts. 

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