Iran had been pressing New Delhi for allowing Parsian Bank to open a branch to settle oil and other trade with India.
The matter was examined by Reserve Bank of India, and subsequently, based on RBI's report, a decision was taken by the Finance Ministry not to agree to Parsian Bank's application, sources privy to the development said.
Earlier, the Ministry of Home Affairs had denied security clearance to applications by Parsian Bank and two other Iranian banks fearing threat of money laundering and terror financing in banking transactions as cautioned by the Financial Action Task Force (FATF).
India became a member of Paris-based FATF in 2010 and is required to follow standards prescribed by FATF to check money laundering and terror-financing activities.
Sources said since RBI in December 2010 scrapped a long-standing mechanism of settling payments through the Asian Clearing Union mechanism, India pays 55 per cent of the value of oil its imports from Iran in euro payments through Turkey's Turkiye Halk Bankasia. The balance 45 per cent of crude payments are made in rupees through UCO Bank.
Under the rupee payment mechanism, 45 per cent of the payments made by Indian oil companies for their imports from Iran are credited in rupees in the accounts of Iranian Banks maintained with UCO Bank.
These rupee resources are being used for making payments for Indian exports, including project exports, to Iran.
Besides opening a branch, Tehran also wants the rupee balance in the UCO Bank accounts to be permitted to finance third country imports by Iran.
The operational modalities have to be discussed and agreed between the two sides, sources said.
India imported 17.44-18 million tonnes of crude oil from Iran -- 10.5 per cent of the nation's total oil imports in 2011-12. This year, imports from Iran are likely to dip to 14-16 million tonnes or 8.4 per cent of 190 million tonnes of planned crude oil imports.
Bilateral trade between the two nations is skewed in favour of Iran. In 2011-12, the total trade between India and Iran was around USD 15.94 billion. While India's exports were around USD 2.4 billion, India's imports from Iran were around USD 13.5 billion. India's imports exceeds that of its exports by USD 11.14 billion.
Sources said while India's gross exports to the world increased by more than 21 per cent during 2011-12 as compared to previous year, India's exports to Iran declined by 3.8 per cent.