UCO Bank, an Indian bank that has gained worldwide notoriety for continuing to handle a large volume of transactions for Iran during a time in which sanctions were being tightened against that country, is now positioning itself for what will happen after sanctions. During the height of the sanctions squeeze UCO has been the beneficiary of handling billions of dollars in frozen oil payments on behalf of Iran. This role boosted its interest margins and caused a significant windfall for the bank. It is reported that UCO is holding roughly $3 billion in Indian rupees on behalf of Iran in its accounts.

In order to obtain waivers from U.S. secondary sanctions, India has had to cut back sharply on its imports of Iranian oil. Despite dwindling imports, Indian purchasers of Iranian crude oil are still depositing rupees at UCO Bank for such purchases. Those funds are then used to pay Indian exporters to Iran against letters of credit opened by private Iranian banks. This has caused UCO to benefit greatly due to the difference in value of the oil receipts vs. the value of Indian exports to Iran, and the time difference between the imports of Iranian oil and the exports of Indian products.

As proof of this beneficial relationship it should be noted that UCO Bank posted a four-fold annual jump in its September quarterly earnings while net interest income grew 55%. Total assets increased 30% to Rs 2.12 trillion at end-September from Rs 1.63 trillion in March 2011. Currently, the Iranian oil receipts account for roughly 12% of UCO’s total deposits.

UCO Bank executives have stated that they hope the new sanctions relief that is part of the Joint Plan of Action entered into by Iran and the West over its nuclear program will provide a further windfall if oil shipments from Iran increase following the implementation of such relief. However, they are likely misguided in their thinking. After all, the sanctions relief that is being contemplated and is relevant to the consideration here is two fold: 1) a release of $4.2 billion of Iranian money from frozen accounts, such as the one at UCO, and 2) a suspension of sanctions on petrochemical (of which crude oil is a raw material) transactions with Iran. This could make it more likely that the $3 billion at UCO Bank leaves the bank, as opposed to continuing to pile up. The key question will be whether the rate at which Iran pulls the funds out of UCO Bank during the six month sanctions relief period will outpace the fees accumulating for new Iranian crude oil imports. If it does then UCO Bank’s windfall could turn into an affliction, as large portions of those funds it has been propping its growth upon may be leaving its accounts soon.