This most recent step will help organize the process of securing sufficient working capital to operate smooth trade activities and thereby will mitigate the costs of trade. It will also set out the standards for the proposed ITFS organizations and will generate a more favorable ecosystem for trade finance in the nation.
What is Trade Finance?
Trade finance simply represents a set of several finance instruments & products being provided by the banks & financial institutions to enable companies to execute international trade transactions smoothly & successfully. Any trade deal involves a seller and a buyer of particular goods & services. But when these transactions are made over thousands of miles across the world, it brings associated overseas risks, and trade finance helps in reducing those risks for both the importers & exporters who are completely unfamiliar with one another. Trade finance is an umbrella term that covers many financial products that are being offered by banks & FIs to make trade transactions feasible.
As per the World Trade Organization, some 80-90% of world trade depends on trade finance, including trade credit and insurance or guarantees like Letters of Credit, Bank Guarantee, etc., some of which are short-term.
How Trade Finance Works?
Due to the large financial nature of international trade, exporters demand an advance or upfront payment from the importers for the shipped goods & services so that the exporters can manage the costs of the shipment and other expenses with sufficient working capital funds. However, to reduce the overseas risks, the importer asks the exporters to produce the documents of shipment as evidence of delivery of the goods.
Then, the importer approaches his/her bank to provide a Letter of Credit as a guarantee of on-time payment to the exporter or exporter’s bank upon the presentation of certain documents such as Bills of Lading, etc. The exporter’s bank may provide a loan to the exporter based on the export contract.
The type of the trade finance instrument being issued by a bank depends on the nature of the transaction and how evidence of performance can be witnessed ie. Bill of Lading to show successful shipment of goods. It is essential to keep in mind that banks are only responsible to deal with the documents, not the actual delivery of goods, services, or performance to which the documents are related.
What Are The Circumstances In India?
Importers and exporters are struggling in gaining sufficient finance, especially in the terms of their capability to convert trade receivables into liquid funds or to achieve short-term funding for their payment for import of the goods and services.
In this process, SMEs i.e. small & medium-sized enterprises are adversely affected as they often have to face hurdles to get enough funding for their working capital requirements, even after finding an international buyer who is willing to send over prepayment. Read more: https://www.prfree.org/@emeriobanque/india-s-advanced-step-to-secure-more-international-trade-finance-and-why-it-is-essential-for-exports-6rmy4br8rkb4
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