Special address at the 5th National Summit on Trade Finance for Inclusive Growth organized by ASSOCHAM

(Special address at the 5th National Summit on Trade Finance for Inclusive Growth organized by ASSOCHAM on 17th May 2024 at the India Habitat Center)

Respected Dignitaries on the dais, Dr Charan Singh, Sri Devendra Sharma, Shri Rajnish Kumar Ji, Sanjeet Singh Sir, and other experts from the industry and trade here, it is indeed a great pleasure to be present here for the 5th national summit on trade finance for inclusive growth. The advantage of coming in last to speak on the podium is that most of the issues that are worth talking about have already been said. So that makes my role easier. However, I would take this opportunity to set context and historical background to where we are coming from, to this moment in trade finance today. I will focus on trust and inclusiveness and how the revolutions in trade finance over centuries have enlarged both trust and inclusiveness in this area and what can we look forward to. 

The issue at hand that we are concerning ourselves with today is an important one. Trade finance attempts to solve the problem of distance, both physical and temporal, and the associated risk that arises due to the distance between accrual and realization of the payment. When we talk about risk, we are also talking about trust. There is low risk in a high-trust society backed by strong institutions and the rule of law.

From this perspective, if we trace back trade finance, we can see that the origin of trade finance in India goes back to the Mauryan Empire days. India has been a trading nation historically, and trade finance has acted as a lubricant for all these centuries, both in North and South India, spanning the GT Road, Silk Route, and sea trade to ASEAN and Africa. The system of trade finance in India evolved over centuries, and we had a fairly functioning system of trade finance instruments such as hundis, which are in many ways similar to the trade finance instruments we see today. For example, the Darshani hundi is similar in concept to an at-sight obligation. In fact, darshan itself means "darshan hone par," which is literally at sight. Similarly, Jokham hundis were designed to factor in the risks associated with the transportation of goods, particularly in maritime trade, and are analogous to contemporary trade finance instruments that include risk assessments and insurance features. Muddati hundis were used for transactions requiring credit extended over a period, much like today's usance letters of credit, where payment is deferred to a predetermined future date.

Of course, India was not alone. The Chinese Fei-Qian (flying money) system that was similar to our aangadiya system, the suftaja and hawala of the Islamic world, the bills of exchange, and other banking systems of the Jews of Europe, among others, were such systems. However, the trust in this system was based on faith in close-knit communities and their members, such as Jews or the Marwaris. There was low trust in members from outside the network. This was the great limitation of how much this trade finance system could develop. The first revolution in trade finance started happening when the rule of law began to prevail in society – starting with the Magna Carta, the Renaissance era, and industrialization. This led to the creation of wider networks because instruments backed by contracts were now enforceable in the courts, ultimately leading to the creation of formal banking systems and a high-trust ecosystem backed by institutions such as government and courts.

This led to formalization, which engulfed the traditional instruments such as Hundis, which were, in a way, formalized in the banking system by the British, who accepted Hundis and discounted them too. The Negotiable Instruments Act of 1881 is a key milestone in this regard. The apex of the first revolution in trade finance was through the Uniform Customs and Practices during the 1930s, which standardized the letter of credit system for international trade, following which this mode of trade finance proliferated. This further got a fillip after the world of trade accelerated significantly through containerization starting from the decade of the '60s. Financial globalization followed the containerization wave, and financial innovations grew until the global financial crisis, which made people question the underlying assumptions for developing needless instruments for secondary markets based on the trust of enforcement. Luckily, the trade finance survived without much harm as underlying risks were factored in into the instrument most of the time. 

This brings us to today’s era, where we are now staring at the next big revolution in trade finance, which would be based on trust in a digital system – based on paperless transactions and digital smart contracts that cannot be hacked or manipulated easily and are backed by institutions and courts. 

Basically, we are going to rely on lines of computer code. 

Governments across the world are in the process of implementing reforms, and UNCITRAL’s Model Law on Electronic Transferable Records (MLETR) is being customized and adopted by many countries today. This will help usher in digital negotiable instruments. By providing a harmonized legal framework, MLETR facilitates the broader acceptance and use of digital negotiable instruments. This transition not only streamlines trade financing processes but also enhances the security and speed of transactions.

India’s movement towards paperless trade, digital negotiable documentation, etc., is clear. India’s commitment to enhancing trade facilitation has been both comprehensive and impactful. Our performance in the UNESCAP Global Survey on Digital and Sustainable Trade Facilitation is a clear indicator of the progress we have made. In the 2023 survey, India achieved an impressive score of 93.5%, up from 90.3% in 2021. This places us at the forefront of global trade facilitation efforts.

What is particularly noteworthy is that India achieved a perfect score of 100% in four key areas: Transparency, Formalities (Single Window Interface for Facilitating Trade), Institutional Arrangement and Cooperation, and Paperless Trade (e-Sanchit and Pre-Arrival Data Processing systems). These scores reflect our relentless efforts to streamline trade processes through various initiatives.

It is against the background of reforms and facilitation that FTP 2023 was launched last year around this time. We introduced many new things in the FTP – mostly about ease of trade facilitation and ease of documentation. Significant among the new initiatives under FTP 2023 for today’s context would be the introduction of merchanting trade under the FTP and a separate chapter on e-commerce exports – not only because we see greater growth of exports through this mode in the coming years but also due to the reason that this mode has the potential to connect the rural hinterland of India to world markets. However, we realize that certain issues in the area of e-commerce exports need to be fixed first. For example, one of the key pain points in the area of e-commerce exports is that the knock-off in the EDPMS system of RBI is a painful area due to the cost of compliance. Any e-commerce exporter with low-value but higher volume transactions cannot pay the kind of charges levied by the banks. A typical transaction that gains a profit of 500 to 1000 rupees cannot be burdened with the same amount to knock off the outstanding on the EDPMS. The banks levy, on average, 500 rupees to generate the BRC and knock off the EDPMS outstanding.

The problem of technology is solved using technology. This led us to develop a revamped eBRC system, where we are now allowing the exporter to self-generate the BRCs online based on the IRMs that flow from various banks. We are in the pilot cum soft launch phase right now, and as I speak, in the last three months until yesterday, we have generated around 2.5 lakh BRCs worth Rs 3200 crores. The good news is all these BRCs were generated free of cost. We are now fine-tuning our API ecosystem for the new BRC system so that banks, FinTechs, and other players can use their systems to automate the BRC generation. We are also in talks with RBI to further smoothen the interface between the BRC and EDPMS system and explore ways in which we can knock off the outstanding without cost for small exporters, especially MSMEs. 

When we talk about API interface, we need to understand that this is an important part of the whole ecosystem that we are planning to build in the second revolution phase fo trade finance. We already have APIs that can pool data for account aggregators from banks, GST network, Income Tax portal and so on and create a profile of a buyer/seller that can be plugged into the finance ecosystem to determine creditworthiness and repayment abilities. When extended through MLETR measures and digital negotiable instruments, this will usher in the second revolution in trade finance that we are talking about. 

When we look at such issues that lie at the intersection of trade documentation and finance, we realize that we missed out on introducing a dedicated chapter on Trade Finance under the FTP. Currently, there is no single entity or department in the government that focuses on Trade Finance exclusively. A chapter in the FTP ensures that a dedicated team focuses on the issues of trade finance as it indicates that the buck stops here and one gets the single address within government where one may send the concerns in this area. 

The gap feels more acute when we look at the data and realize the gap in trade finance when compared to the world. Let’s take factoring for example. The size of the market for factoring in the world is around 3.8 Trillion USD today. Out of this, if we look at the amount of factoring that happens in India, it is hardly 21 Billion USD in FY 2024 – based on RBI’s TReDS data. This is a yawning gap, especially when compared with China, which is touching around 600 Billion USD in factoring. More worrisome is the low number of firms that are involved in factoring as of now. Even with the factoring reforms that have taken place, the new entrants are still under 50. China has over 2000 firms in this space.

We need to ponder on this from the regulatory and policymaking point of view. 

When it comes to policymaking, policymakers rely upon data to make intelligent policies. When it comes to trade finance, especially export credit, we don’t have good data. The export credit outstanding that is reported for certain days of the year, as reported by RBI, is not a very helpful data point for policy analysis. Rather, the flow of credit data, and export credit disbursed details, which lie with individual banks must be collated in an intelligent way to arrive at good insights and policy interventions.

Let me give you an example of how good data helps using the example of  IES Scheme that Rajneesh sir just spoke about. There was always apprehension in the policy-making circles that the Interest Equalisation Scheme – which basically gives an interest subvention of a certain percentage to industry – is misused by the banking sector. Then we developed an IT system and a unique identification number to identify loans given to individual exporters from a bank. Using this, we gathered the data over the year. The data is informative – the interest rate for MSMEs is 8.5% on average. For non-MSMEs, it is around 7.9%. The standard deviation is around 1.5% for both, so if we take 2 standard deviations to cover over 97.5% of the applicants, the rate for MSMEs tops out at 11.5% and 10.9% for non-MSMEs before subvention. However, in terms of the total credit outgo, around 35% of the loans went to MSMEs and 65% went to non-MSMEs. This contrasts with the beneficiaries count, where we saw that over 70% of the beneficiaries are MSMEs. The rates were above the repo rate for sure; at that time it was around 5.9% or 6.25%, if I am not wrong, but they were still not usurious as thought earlier. This was possible to analyze because we could lay our hands on the data. However, such data is not always available unless the data collection is planned properly.

This brings me to the Trade Finance study we are conducting at DGFT. Many of you might have recently received an email seeking your comments and input on the matter of trade finance with a very long questionnaire. E&Y is our partner in the study, and we are aiming to cover multiple areas of trade finance through the study. The main objectives are:

- Identify global best practices and benchmark against them

- Identify the latest trends in technology and future developments in the area of trade finance

- Identify institutional, policy, and regulatory reforms needed to align with the future needs of the country in the area of trade finance

- Propose comprehensive solutions with a roadmap for implementation

As this cannot be an armchair exercise sitting in DGFT, we are reaching out to all our industry partners, banks, and financial institutions. All suggestions and ideas are welcome in this regard. Our team is present here today and will be taking copious notes during the sessions to take back and ponder upon. Rest assured, we would be acting upon these suggestions received here today. 

I hope the discussions and sessions here pave the way and provide a roadmap for a prosperous India with seamless trade finance to triumph in international trade inclusively in the future. My best wishes to the participants and organizers. 

Thank you.