THE RESERVE BANK of India (RBI) has asked banks to exercise caution in their business plans going forward, specifically on lending to companies with a significant exposure to Europe and the Americas. The concerns have been flagged in the wake of the Russian invasion of Ukraine, following which the government has been nudging state-owned banks to open special rupee vostro accounts to facilitate trade with Russia and other countries, as also the worries regarding an impending slowdown in the European and American markets.
In a meeting held on November 16 and chaired by RBI Governor Shaktikanta Das, banks were also asked to maintain sectoral quota for lending to ensure that the credit growth in the domestic market is healthy and sustainable, sources aware of the development told The Indian Express. The meeting was attended by top executives of all public-sector banks.
An email to the RBI seeking responses on the issue did not elicit a response till the time of going to print.
Since Russia’s invasion of Ukraine, various countries in the West and the US have imposed sanctions on Moscow and the country is off the SWIFT messaging system (used by banks for payments in foreign currency for cross-country transactions). The sanctions on Russia, and India’s increased dependence on Russian imports were the key reasons behind the provision for overseas trade in Indian Rupee.
In July this year, the RBI had announced guidelines on overseas trade in Indian Rupee, which was also intended to curtail India’s dollar dependence for trade and help strengthen the rupee. Under the arrangement, banks in India will open Vostro accounts (an account that an Indian bank will hold on behalf of another bank) of the correspondent bank/s of the partner country for trading. Indian importers can pay for the imports in rupee into these accounts. These earnings (from Indian imports) can then be used to pay Indian exporters in Indian Rupee.
Banks have, however, been reluctant since they fear sanctions by the West and the State Bank of India, the country’s largest lender, has stayed away from opening any special vostro account to facilitate trade with Russia.
So far, 12 special vostro accounts have been opened by banks like the state-owned UCO Bank and private sector IndusInd Bank and Yes Bank, and their corresponding Russian partner banks.
Despite the sanctions on Russia post its invasion of Ukraine, India has decided to not just continue with, but also double its trade with Moscow in the “near foreseeable future”.
The increase in trade volumes between the two countries have mainly come on the back of sharply higher import of discounted Russian crude by India. India, which imported less than 1 per cent of its total crude from Russia before the Russia-Ukraine war, now imports about 22 per cent of its total requirement from it. Crude imports from Iraq and Saudi Arabia, which were the top two suppliers of crude, constitute around 21 per cent and 16 per cent, respectively, of India’s total imports.