The latest mechanism to introduce International Trade Finance Services (ITFS) in India is being considered a strong move that will bring advanced trade finance opportunities for the Indian exporters and importers from global platforms.
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.
What Has Happened Now?
The establishment of the ITFS platform has been sanctioned by the finance ministry. This advanced platform is aimed at empowering exporters and importers to avail several types of trade finance instruments as per their suitability at competitive prices for their international trade requirements, most essentially from international sources.
A dedicated electronic platform, ITFS is structured to help in converting their trade receivables into liquid funds and to get short-term funding.
What Is Its Process?
This provisional step towards ensuring more liquidity for exporters and MSMEs is being driven by the International Financial Services Centres Authority (IFSCA) at Ahmedabad's Gujarat International Finance Tec-City (GIFT City), a project being firmly checked and pushed by the Prime Minister’s Office.
This ITFS framework will give a chance to the members to avail trade finance services for trade transactions such as Export Invoice Trade Financing, Reverse Trade Financing, Bill Discounting under Letter of Credit, Supply Chain Finance for Exporters, Export Credit (Packing Credit), Insurance/Credit Guarantee, Factoring and any other qualified product, on the ITFS platform.
In particular, it will also permit any entity willing to set up and operate any organization as an ITFS in any IFSC. At present, the only IFSC in India is in GIFT city.
The organizations set up as ITFS will give electronic platforms to all members. It shall spread the data about bills/invoices, discounting, and quotes on a real-time basis, upheld by a robust MIS (Management Information System) to every applicable party. It shall also have a reasonable Business Continuity Plan (BCP), including a disaster recovery site.
Who Can Set Up An ITFS?
A bank or a finance organization is required to incorporate as a separate company to be established as an ITFS in an IFSC. The parent entity or promoters or promoter groups of the organization applying to set up a company as ITFS is required to maintain a minimum net worth of $1 million.
The organization, proposed to be set up as ITFS, ought to have a minimum paid-up equity capital of $0.2 million or comparable in some other freely convertible currency.
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