RBI directs checks on small Russian banks for payments

The Reserve Bank of India (RBI) has told Indian lenders to conduct due diligence on smaller Russian banks that have been spared Western sanctions before it allows them to participate in the domestic fund clearing system and resume bilateral payments, said a person aware of the development.

Indian lenders have identified six small Russian banks, including Bank Zenit, which have been spared from the sanctions and can therefore be used to make and receive payments. However, for conducting Swift transactions, the transacting Indian and Russian banks will need to work through Swift’s Relationship Management Application (RMA) system.

RMA is a Swift-mandated authorization or filter, allowing banks to define which counterparties can send them financial messages.

“Those are being established and examined and we need to do due diligence for that. We have found out a few banks that have been suggested by the government as well but we do not have any relationship with these lenders so far,” said the person cited above.

Following Western sanctions, transactions between the two countries—typically made through large Russian banks—have grinded to a halt. The sanctions were announced in response to Russia’s invasion of Ukraine. The central bank, government and commercial banks are now discussing ways to resume payments between India and Russia.

An email sent to RBI remained unanswered till press time.

“Many of the smaller Russian banks do not have offices in India and we have to find out how that bank can have an account with an Indian bank or with the RBI. With one or two, we will need to have correspondent relationships,” said the person cited above.

The central bank, this person said, had sought data on how much investment and credit exposure each Indian bank has in Russia. “All that data has been shared but it is not very significant. Investments in Russian entities and even loans to those are not much. Therefore, the losses to any Indian entity on account of those is not going to be much,” he said.

Following the sanctions, payments to any entity in Russia—including those that don’t have any sanctions against them—are taking longer than usual because of enhanced due diligence, the person said.

To be sure, bilateral trade between India and Russia in the fiscal year ended March 2021 amounted to a relatively modest $8.1 billion. India’s exports totalled $2.6 billion while imports from Russia amounted to $5.48 billion.

Meanwhile, the government is looking at a gamut of options to unclog trade payments. According to the person cited above, the rupee-ruble trade being talked about is largely for defence-related payments as many of those entities are on the sanctions list. Since the government cannot change these suppliers overnight, payments to these companies are being considered through this route, he said, adding that for entities not on the sanctions list, banks will have to engage with smaller Russian lenders.

India’s departments of economic affairs, and financial services as well as the ministries of commerce and industry, and external affairs are brainstorming alternative ways for releasing payments to exporters and businesses stuck with Russia due to the sanctions.