The rupee payment mechanism has started witnessing a “few transactions” in terms of trade with Russia and is expected to gain further traction in the days to come with more countries including Sri Lanka, Bangladesh and a few African countries likely to evince interest in the same.
According to Soma Shankara Prasad, MD & CEO, UCO Bank, it may take some time for the mechanism to pick up fully. It will work wherever there is a balance of trade between two countries, he added.
In order to promote exports, the Reserve Bank of India issued a circular on July 11, allowing trade settlements between India and other countries in rupee with immediate effect. Indian importers undertaking business through this mechanism will have 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 trade.
UCO Bank had opened a special vostro account with Russia’s Gazprombank.
“A few transactions have happened (in case of Russia)… only that it should not be a sanctioned commodity and it should not be a sanctioned bank (with whom we are dealing),” Prasad told newspersons on the sidelines of the bank’s 80th year celebration here on Tuesday.
The mechanism would work well wherever there is a two-way trade between the countries and where there is no deficit. “There are a lot of countries like Sri Lanka, Bangladesh and some countries in Africa that may evince interest in the mechanism,” he added.
Prasad had earlier said that the rupee payment mechanism was hardly witnessing actual transactions even until January this year despite the necessary infrastructure being put in place as trade invoicing was not happening in rupee terms. The bank also had several meetings and sessions with exporters, Indian Banks’ Association and other stakeholders. For actual transactions to happen it would require some amount of coordination between business people of two countries and for government to see that invoicing happens in rupee terms, he had said.
Credit growth
According to Prasad, the credit demand has been good so far this fiscal and given the expected capital expenditure by government and spending on infrastructure is likely to boost credit demand moving forward.
UCO Bank, which has seen its loan book grow by nearly 20 per cent at ₹1,51,059 crore as on December 31, 2022 backed by a healthy demand for credit from retail, corporate and agriculture sectors, expects the momentum to continue moving forward.
The bank’s total business has touched ₹4-lakh crore as on date.
Deposit growth
Deposits growth, which has been slightly laggard as compared to growth in advances, is likely to pick up moving forward now that the government has announced removal of tax incentives for some debt mutual funds, he said.
Banks will have to find avenues to deploy the funds so as to earn good interest income to hold their margins.
“Overall the cost of funds will go up and there will be a pressure on the margins as the incremental deposits which would be coming in would be at higher rates,” he said.
UCO Bank, which had registered a net interest margin of 2.99 per cent for the quarter ended December 31, 2022, expects to hold its margins steady at those levels. The bank, which had recently raised close to ₹500 crore tier I capital, has the board approval to raise another ₹1000 crore and it might look at going in for an equity issue, mainly to bring down government holding in the bank, sometime next fiscal. Government holding in the bank currently stands at 95.39 per cent.
Responding to a query on the recent Supreme Court verdict asking banks to give borrowers the right to be heard before classifying their accounts as fraud and its impact on the ongoing insolvency of Srei group companies, he said, it might lengthen the process of resolution.
Inaugurating 50 branches of the bank virtually on the occasion of the 80th year, President Droupadi Murmu said banks need to strike the right balance between protecting people’s money and creation of assets so as to ensure economic progress. “The first responsibility of banks is to protect people’s money. The other important aspect of banks is creation of assets. This balance has to be maintained, and if disturbed, there will be an economic problem,” she said.