Relations between banks in India and Pakistan are improving as a result of the two-year peace process between the two nuclear rivals that have fought two wars over the disputed Kashmir region since independence in from Britain in 1947.

But according to reports in the Hindu Business Line, bankers in India remain wary of accepting letters of credit (L/Cs) and guarantees from banks in Pakistan.

Bank links

Until very recently, Indian banks have insisted on using internationally recognised western banks in financial transactions with Pakistan. Now, according to the financial daily, Indian bankers are prepared to deal with Pakistani banks with international networks such as Habib Bank and Muslim Bank.

Indian public sector banks with trade financing arrangements with counterparts in Pakistan include Punjab National Bank, which has trade financing arrangements with Habib Bank. Canara Bank meanwhile is mulling over the re-opening of its Karachi branch, expropriated by Pakistan in the 1940s.

Cautious approach

Generally, Indian banks will only agree to L/C acceptance by Pakistani banks listed in the international Bankers Almanac, which is the same approach bankers in Indian public sector banks adopt with L/C business with China (DC World News, 13 September 2005).

Some Indian banks are looking for even more security by limiting L/Cs to the balance of correspondent or nostro accounts held by Pakistani banks with their Indian counterparts, according to the Hindu Business Line.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.