the home ministry has refused to allow three Iranian banks to open branches in the country because of concerns about money-laundering and terror financing, a report said on Friday.
The move complicates government's efforts to settle its oil trade bills with the Islamic Republic, the Indian Express daily reported, quoting an unnamed home ministry official for the report.
The ministry has denied security clearance to applications by Parsian Bank, Bank Kasargad and Eghtesad-e-Novin Bank because of its obligation to guard against money laundering and terrorist financing, the newspaper said.
There was no immediate comment from the home ministry.
Government plans to import 15.5 million tonnes of crude oil from Iran this year.
It has faced difficulty in finding banks to transfer payments to Iran due to US-led financial sanctions against the Islamic republic that have dried up dollar payment routes.
To help circumvent this, India and Iran clinched a deal under which New Delhi would pay for close to half of its Iranian oil purchases in rupees.
Allowing branches of Iranian banks to set up in India would made it easier for firms to boost rice, tea, yarn, fertiliser and textile exports to Iran as well as facilitate cooperation on engineering and other projects.
Iran will use the rupees it receives for oil to buy Indian goods. Large delegations from each country have already made visits to explore trade opportunities.
Transactions are now routed in euro payments through Turkiye Halk Bankasi and 45 percent of crude payments in rupees through India's state-run UCO Bank.
Department of Economic Affairs plans to ask the home ministry to reconsider its decision, citing "strategic compulsion" for the opening of the Iranian bank branches, the newspaper said.
Iran is also looking to India for transfer of technology to modernise its textile industry and investments in a railway corridor to connect Iran to Caspian Sea countries.
India, which imports four-fifths of its crude, says it shares the US anti-nuclear proliferation goals. But it also views Iran as an important source of oil to feed its economy's fast-growing needs and sees Iran as a key ally in stabilising Afghanistan following the US planned troop exit.
The United States says Iran's nuclear drive is aimed at making an atomic bomb but Iran insists it is for civilian energy.