Indian lenders have approached the Reserve Bank of India (RBI) after the US Office of Foreign Assets Control (OFAC) asked banks there to refrain from processing payments linked to the Asian Clearing Union (ACU) mechanism.
The ACU allows transactions to be squared off by participating central banks on a multilateral basis, leaving only smaller net amounts that need to be paid. The ACU members are Bangladesh, Bhutan, India, Iran, the Maldives, Myanmar, Nepal, Pakistan and Sri Lanka.
“There is some issue related to where the ACU is headquartered. We are given to understand that the OFAC has asked all US correspondent banks to stop processing payments,” said a senior banking executive aware of the developments. This means no settlement can be made through foreign banks in dollars going ahead under the aegis of the ACU, he said.
To be sure, the ACU is already transitioning toward settlement in local currencies, according to a government official.
“So, these sanctions won’t impact us any more in the long run. Already, there is a consensus among ACU members to reduce reliance on any one currency,” he said.
Still, the advisory by the US financial intelligence and enforcement agency could have significant implications for India’s trade settlement with ACU countries, including Bangladesh and Iran. As per reports, India controls nearly 93% of the ACU’s credit positions.
The ACU was established with its headquarters in Tehran, Iran, on December 9, 1974, at the initiative of the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) to promote regional cooperation.The lenders, earlier this month, had sought RBI’s intervention, seeking clarity and solutions on payment processing since there is no alternative mechanism to settle trades between ACU members and India, said another person aware of the development.
The OFAC advisory was sent to US-based banks, which brought this to the attention of Indian lenders, the person said.
The RBI and ACU didn’t respond to queries.
According to a report published by the ACU last year, India is the main creditor among the ACU member countries. The same report stated that in 2020, India topped the list of ACU member nations with transactions at $8.4 billion.
In 2022, a report by the Inter-Departmental Group of the RBI on the internationalisation of the rupee stated that the central bank had proposed the use of local currencies by members for settlement of ACU transactions. This also floated the idea of the rupee being included as one of the settlement currencies under the ACU.
Another official said that there have been preliminary discussions within ACU to develop an alternative to the international financing messaging system SWIFT (Society for Worldwide Interbank Financial Telecommunications), the channel used worldwide to transfer funds across borders.
