NEW DELHI, Aug 8: India is thinking of providing a 20 billion rupee ($327 million) state guarantee to back local insurance for refineries that use Iranian oil and therefore cannot get foreign cover due to Western sanctions, an industry source said.

The government has previously ruled out such a guarantee but a drop in India's currency to record lows means it is keen to boost oil imports from Iran, which has agreed to be paid in rupees, as dollar-priced oil imports have grown more expensive.

The finance ministry is now willing to consider covering half of a planned total 40bn rupee fund for underwriting such insurance, to which the oil ministry and local insurers would contribute 10bn rupees each.

The finance ministry decided to consider a “facility/sovereign guarantee” of 20bn rupees at a meeting chaired by the financial services secretary on July 31, the source said on Thursday.

A finance ministry spokesperson declined to comment.

Two state-run refiners have had to halt imports from Iran since April because of problems in securing insurance for their refineries. That helped cut India's imports from Iran by more than half in June.

Sanctions imposed by Washington and the European Union to dissuade Iran from pursuing its nuclear programme have pushed Tehran into accepting payment in rupees, which are not freely traded, for some of its oil. India will soon start settling all its trade with Iran in rupees.

If the finance ministry suggestion goes ahead, Indian refiners would be able to take up local insurance backed by Indian reinsurer General Insurance Corp (GIC), which can tap the government fund and sovereign guarantee.

India had been depending on European markets to hedge its risk but European reinsurers have added a clause in contracts with Indian firms that meant claims arising during processing of Iranian oil would not be met.

The finance ministry plans to allow refiners to take up insurance cover from companies outside India, as well as domestic providers, if they are not limited by that clause, the source said.

State-run refiner MRPL, which used to be Iran's biggest Indian client until insurance problems prompted it to stop purchases in April, has already indicated that it will resume Iranian imports from this month.

Iranian insurers have offered to cover Indian refiners processing its crude, but Indian companies may be reluctant to accept for fear of being exposed to the sanctions.

For shipping, Iran has offered sovereign guarantees of up to $1bn for its containers and crude oil vessels.

Existing sanctions have already reduced OPEC member Iran's oil exports by more than half from pre-sanction levels of about 2.2m barrels per day (bpd), costing Tehran billions of dollars a month in lost revenue.

The US House of Representatives earlier this month passed a bill aiming to cut Iran's oil exports by another 1m bpd over a year to near zero.—Reuters