Iran's Bank Parsian has stopped issuing payment guarantees for Iranian importers who buy Indian goods, because its account that was set up to skirt Western sanctions does not have the necessary funds in rupees.

India, exempted on Monday from the latest US sanctions against Iran's disputed nuclear programme after cutting crude purchases from Tehran, is the world's fourth-largest oil importer and the second-biggest customer of the Islamic republic.

New Delhi and Tehran in January had agreed on a barter-like system to settle 45 percent of their $10 billion-plus a year oil trade in rupees, which are not freely traded internationally, and use them to repay Indian exporters of other goods.

In this arrangement, letters of credit (LCs) would have guaranteed payments and smoothed trade, which could have helped Iran's economy as sanctions squeeze its oil sales and revenues.

India's only other means of payment to Iran currently is in euros through Turkey's Halkbank, after a clearing mechanism in dollars was closed by the Reserve Bank of India under pressure from Washington in December 2010.

'We have decided to stop opening letters of credit because we are committed to pay beneficiaries when they present (the shipping documents for) the goods,' Bank Parsian's vice-president for international affairs, Mohajeri Tehrani, told Reuters by telephone from Tehran on Tuesday.

'From two, three months we are waiting to receive funds from them (Indian oil firms). But unfortunately they have not paid so far to our account with (India's) UCO Bank,' Tehrani said.

Indian refiners are waiting to make payments into the account at UCO Bank until New Delhi implements a planned exemption for them from a hefty local tax, which was announced in March and can take up to 60 days to be put into effect.

Uday Narayan Mitra, general manager for treasury, international and finance at UCO Bank, declined to comment.

Exporters' woes

Indian exporters had hoped to boost sales under the rupee scheme and create a new market for their goods in Iran, which has reduced imports from western countries under pressure from sanctions, and they are now rethinking their business plans.

India is keen to step up exports of food and other items allowed under sanctions such as engineering goods to strengthen its own economy and fix a trade imbalance tilted in favour of Iran.

'Bank Parsian has stopped issuing LCs leading to a huge backlog in payments. We are requesting the Indian government to step in and help us,' M P Jindal, president of the All India Rice Exporters' Association, told Reuters.

Jindal said Iranian importers now owe Indian rice exporters about Rs10 billion ($179.3 million).

India, the world's second-biggest rice producer, exports about 1 million tonnes a year of mostly basmati to Iran, a leading importer of the aromatic grain.

Parsian's Tehrani said Iran had offered to deposit about 10 million euros ($12.5 million) in the bank's account with UCO bank to settle the dues of Indian exporters. 'Unfortunately they (New Delhi) did not accept our request,' he said.

'We have LCs worth 20 million rupees under negotiation with UCO Bank, but it's been over a month and we have not got a payment,' said Pankaj Bansal, a partner at engineering goods maker TMA International.

He said there had been discussions over new business worth 50 million rupees, but added: 'Now we are thinking whether we should produce the goods for Iran or not ... As per the current scenario I am apprehensive whether this system, not working now, will work in future.'-Reuters