Indian refiners will make payment in rupee to UCO Bank, which will be transferred to RBI for onward credit to the central bank of UAE. The UAE central bank will then make payments in dirhams to Iran

India will pay Iran $1.65 billion through the United Arab Emirates (UAE) central bank to clear over 40% of the backlog payments for oil imports.

Since February 2013 when the US blocked payment channels, India has been paying 45% of its oil bill to Iran in rupees through a UCO Bank branch in Kolkata. For the rest, it has been waiting for a payment channel.

As much as $4 billion has been accumulated in past dues. A payment mechanism is now in place under which $1.65 billion in three equal instalments of $550 million each will be transferred to Iran via the UAE central bank, senior government and industry officials said.

Under the two-stage payment mechanism worked out, Indian refiners, in proportion to their dues, will make rupee payment to the UCO Bank. This money will be transferred to the Reserve Bank of India (RBI) for onward credit to the central bank of UAE.

The UAE central bank will then make payments in dirhams to Iran.

Officials said the first two instalments may be paid this month and the third $550 million tranche by 20th July deadline set by the US and five other world powers for Iran to receive part of its past payments from its oil buyers.

The two instalments this month will be made up of $238 million by Mangalore Refinery and Petrochemicals Ltd, $232 million from Essar Oil, $57 million by Indian Oil Corp (IOC), $8 million by Hindustan Petroleum Corp Ltd (HPCL) and $15 million by HPCL Mittal Energy (HMEL).

Iran is seeking interest on pending dues. However, the Indian government as well as the RBI have flatly refused to pay interest saying they have always been ready to make timely payments but the problem of mode and channel were due to Iran.

Under an interim nuclear deal with US and five other world powers, Iran on 24 November 2013, won access to $4.2 billion in past oil revenues from a number of countries including India.

The funds, which previously could not be transferred as western powers clamped down on payment routes, were to be paid in eight instalments of $550 million each beginning with the first transfer by Japan on 1st February.

South Korea was to make two payments in March totalling $1.1 billion and India was to make its first payment on 17th May, but in absence of payment modalities it was delayed.

There is now a broad understanding on the payment route and subject to agreement with Iran the first tranche may go out as early as next week, officials said.

India had been, since July 2011, paying in euros to clear 55% of its purchases of Iranian oil through Ankara-based Halkbank. The remaining 45% due amount was remitted in rupees through UCO Bank.

Payments in euro through Turkey ceased from 6 February 2013 but the rupee payments for 45% of the purchases continued through UCO Bank.