MUMBAI : While the government explores alternatives to work around the Swift messaging ban on some Russian banks, Indian lenders held a meeting earlier this week to discuss challenges being faced following recent sanctions, said two people aware of the development.
The agenda of the meeting -- organized by the Indian Banks’ Association (IBA)-- was to look at the impact of the sanctions on Indian lenders and what could be done to overcome some of the issues being faced, said the first person cited above, on condition of anonymity. He added that at present banks are not in favour or any consolidated request to the Reserve Bank of India (RBI) in the matter since the regulator has already initiated preliminary discussions with banks.
“Banks discussed how realizations of export proceeds and payments for imports have come to a halt after the ban," the person said.
He said that banks have so far not proposed any alternative mechanism to the government or the RBI. However, the central bank has sought details of Indian banks’ transactions with Russian lenders and is assessing the situation, the person added.
Following its invasion of Ukraine last week, the US and the European Union (EU) have barred some Russian lenders from the Swift network. The Society for Worldwide Interbank Financial Telecommunication, or Swift, is a messaging network that financial institutions use to transmit information and instructions through codes securely. As of January, 40% of all Swift transactions by value were in dollars, followed by euro at 37% and pound at 6%.
“The government is exploring various mechanisms to bypass Swift restrictions that makes payments through regular banking channels difficult. Based on suggestions given by the industry, an option is to look at routing payments through banks in third countries where both Russian and Indian banks have a presence," a senior government official said.
A third country is defined as one which is not a member of the European Union as well as a country or territory whose citizens do not enjoy the European Union right to free movement.
According to the official, initial options on the table are routing payments through United Arab Emirates (UAE), Turkey and Hong Kong but a few more are also available for consideration. That said, since the Swift ban is wide enough, the proposed third country payment mechanism would be risky, the government has realized.
“The best option could be a government-to-government arrangement where state-run banks of both countries agree to transact in their respective currencies. The expansion of rupee-ruble trade arrangement seems to be the best bet," he said.
Mint reported on Wednesday that financial transactions of Indian banks with Russian lenders have come to an abrupt halt after the expulsion of several Russian banks from the Swift international financial messaging network. Since most international transactions are settled in dollars and involve US banks, which cannot transact with Russian entities.
Earlier in the case of US sanctions on Iran in 2012 and again in 2018, banks could not deal in dollars, and refiners routed funds through state-owned Uco Bank because it has only a few foreign branches and used euro and rupee payments instead of dollars. The arrangement was worked out between the government of India and Iran.
