With Iran facing a currency crisis in the aftermath of US sanctions, Indian exporters are having a tough time in exporting to the Islamic republic, Business-Standard reported.
For example, Between April-September 2012, exports of engineering goods from India to Iran fell by almost 35% to $205.33 million, against $315.79 million in the same period last year, according to data from Engineering Export Promotion Council.
Iran is passing through an acute economic crisis with its currency plunging to record low levels and prices of food articles escalating. Iran's currency, rial has fallen by about 40% against the dollar since August.
As a result, Iranian banks have become extremely reluctant to issue letter of credit (LC) for Iranian importers, a crucial link to the which the newly established payment mechanism between India and Iran.
Banks in Iran have been seeking up to 100% margin money for issuing LCs to their importers, which have shrunk the order book of Indian exporters, said Indian exporters.
In December 2010, the Reserve Bank of India had scrapped the payments to Iran through the Asian Clearing Union mechanism, after US imposed sanctions on Tehran over its nuclear energy ambitions.
However, with India's energy needs much dependent on Iran, the two countries reached a kind of barter deal around February 2012. Under the new payment mechanism, India pays 55% of the value of oil its imports from Iran in euro payments through Turkey's Turkiye Halk Bankasia.
The remaining 45% of payments on account of crude, are made in rupees through UCO Bank. These rupee resources in turn are being used for making payments for Indian exports. To facilitate a smooth transaction, banks in Iran issue LCs on behalf of Iran's exporters
Iranian banks have been especially reluctant to issue LCs for imports of non essential commodities, which have hit exports in sectors like engineering goods from India.
"Since Iran is going through an exchange crisis, importers of priority sector goods like medicine and pharmaceutical products are getting LCs. However for other sectors it is difficult to get LCs," said Suranjan Gupta, director, Engineering Export Promotion Council.
The EEPC has already taken up the matter with the government in a meeting on November 7.
"We are not getting sufficient buyers in Iran for exports, as due to the currency crisis, banks in Iran are very reluctant to issue LCs," said P K Shah, former president, Federation of Indian Export Organization (FIEO).
India buys around $11 billion worth of oil from Iran - its second-largest crude supplier after Saudi Arabia. However the share of exports is much less at about $2.7 billion in goods.