With one of the world’s most vibrant and fast-growing economies, many are looking to India to be the next engine for trade growth. GTR and BNY Mellon gathered key figures from the trade finance market in Mumbai to discuss the challenges and opportunities the sector faces.
- Finbarr Bermingham, Asia editor, GTR (chair)
- Shekhar Bhandari, senior executive vice-president and business head, global transaction banking and precious metals, Kotak Mahindra Bank Limited
- Ramesh Ganesan, senior executive vice-president and head of transaction banking, IndusInd Bank Ltd
- Ajay Gupta, senior general manager, commercial banking group, ICICI Bank
- Aneish Kumar, managing director and country executive, India, BNY Mellon
- Sumil Rastogi, vice-president, trade finance, HDFC Bank
- Somasekhar V, vice-president and head of business compliance, trade and forex, transaction banking, Axis Bank
- Munindra Verma, senior president and head of trade and cash product management, transaction banking group, Yes Bank
GTR: The current government of India has been taking steps to make trading and transacting simpler and easier. How do you assess the progress that’s been made on that front?
Somasekhar: In India, we have a robust foreign trade policy compared to three decades earlier. When we see the foreign trade policy, many of the items are becoming freely importable. The documentation part of the foreign trade policy has gradually been simplified over a period of time. Previously, we had around 21 to 25 documents that a customer had to submit to the authorities. Today, it has been reduced to seven or eight documents. There has been simplification of documents over the past several years in this regard.
One issue is with physical documents. Although many of the banks have completed their digitalisation process, the synchrony with customs was not available and is now being looked into. The customer gives the documents to the bank. In some cases, the bank has an interface with the customer systems, but banks in turn do not have an interface with the customs offices. This maintains the need for the physical documents to ensure that we adhere to the guidelines of customs or the regulator.
Verma: The Export Data Processing and Monitoring System (EDPMS) and Import Data Processing and Monitoring System (IDPMS) are great developments on that front. What did not happen in the last five decades has happened in the last two and a half years. It is a great change that I see. While there are a few teething issues, we believe that it is a great step in the right direction.
Somasekhar: We agree it is a positive step. Compared to 20 or 30 years back when banks were generally dealing in physical documents today, we are able to at least see them in the system once the data is uploaded by customs. We can be sure that goods have come into the country or gone out of the country. But still, there are some bottlenecks. For example, when goods are delivered in manual ports, there is no entry in the EDPMS or the IDPMS immediately but only at a later date.
Ganesan: The development of these new digital systems has come as the result of a certain need, but it is not a holistic ecosystem change. The trade ecosystem has various parties interacting, other than bankers and customers. In India, the exporter and the importer cannot freely convert currency. There has to be an underlying approved purpose for sending or receiving money into the country. Without the documentation, bankers can’t see the genuineness of the transactions. The EDPMS and the IDPMS came into being in order to verify genuineness of transactions. The issue today is that no one really looks at using these systems holistically, to incorporate every single ecosystem party onto these systems to create convenience for anyone to do a trade transaction.
When we talk about trade as a whole, we need to recognise that India has two parts to it: the domestic trade, which is huge, and then there is the overseas cross-border trade. India is largely made up of small businesses. But the MSMEs don’t have the money or infrastructure to set up digitised systems. We need some sort of overriding enabler, and I now see the government taking action to make this happen. Quite a lot of these things are going to become digitalised in time.
Kumar: Essentially, we need harmonisation across different elements, which is tough as of now. You can get commodity dealers to do that, you can get exporters to do that, you can get importers to do that, but what about customs and the other agents which are still to digitise? The biggest challenge that we see today is the bill of lading itself. They have not tried to digitise those. No project can happen overnight, it takes a bit of time. Harmonisation is just taking off, but it will happen.
Bhandari: We see India in three parts. Independence to 1975; 1975 to 2000; and 2000 to 2015. In my opinion, there has been a significant economic and political change from 2015 onwards, across sectors and arenas. Can 70 years of progress get resolved in 70 minutes? I seriously doubt that. I think in the upcoming 24 months one might see leaps and bounds of progressive change. With the government taking on various initiatives, changes in trade finance processes and documentation can be expected.
Rastogi: I don’t think we should consider these initiatives in import and export payments as a pain area. We’re in a transition period where all of us are putting in efforts for betterment of processes. There are a few gaps in the system right now, but we have a lot of technological changes happening which are addressing these gaps. The idea is to leverage on these systems and try and move to paperless transaction banking.
Verma: Digitisation is not a buzzword anymore. There is a lot of action already happening, which is going to create an unprecedented environment for the future of businesses. Such activity will also instil faith that we are planning for a better tomorrow. It will catalyse digitisation between players and propel integration within India and the rest of the world.
GTR: The point of most digitisation work is to make trade cheaper and more secure. Through this, it should be easier to lend to businesses that need bank capital. Is that something you’re seeing?
Gupta: Historically, we all know that trade is document-intensive and a lot of time gets lost in moving these documents between the seller, buyer and their banks. This directly increases the need for working capital which adds to the cost of goods. Digitisation will help in breaking this time barrier and documents in the digital world can move almost instantaneously, thereby making trade cheaper. Besides, digital documents present fewer opportunities to manipulate documents thereby rendering much higher security and credibility to the underlying transaction. This will give higher confidence to the financiers to fund the trade transactions helping businesses with access to capital.
Kumar: Today, 56% of SME credit requests are being rejected for no reason. 90% are rejected because of AML and KYC issues, according to a 2016 survey by the Asian Development Bank (ADB). In India, half the SMEs don’t have a document which indicates that they are the rightful owners of the business. The Economic Times of India reported in 2013 that SMEs were contributing 40% of the export receivables and supplying 46% of the manufactured goods. In 2016 their GDP contribution was estimated to be 20%. They are contributing 40% of the export receivables. They are supplying 46% of the manufactured goods. It is a big sector. So what are we as bankers doing at least to educate them? We are rejecting them not because we can’t do it. We can do it, provided they give us what we want.
GTR: What can be done in terms of concrete measures?
Kumar: I have been in credit for a long time. They don’t have a constructed financial statement to let me know how to assess the working capital. They give me some figures of exports. If I was to give them finance, what collateral do they have if not a proper document?
Bhandari: I would like to ensure that the entire system of recordkeeping is accurate. Banks’ supply chain finance programmes enable a better turnaround time, thus helping to manage finances efficiently and effectively. That fits with the way the government has focused on putting the infrastructure in place. We talk about the goods and service tax (GST), which is not only a standard tax but also a system of recordkeeping and uploading which helps avoid manipulation. It also ensures that it gives the sense of comfort to all partners in the value chain.
Verma: The Reserve Bank of India (RBI)’s Trade Receivables Discounting System is an amazing example of how digitisation is helping micro, small and medium-sized enterprises get access to easy capital by auctioning their receivables. This digital platform serves as a transparent and quick medium for the small scale players to avail of funds at cheaper rates through banking and factoring companies. These may be baby steps towards making a difference, but slowly and steadily the desired change will be visible in the industry.
Gupta: There was a market report which showed that more than 75% of SMEs self-finance their working capital using their own resources, which also restrains their ability to grow and expand. They are simply not able to meet the credit evaluation requirements of the financiers. Helping these businesses to get timely access to adequate finance would help the overall trade of the country.
Ganesan: Fundamentally how are bankers financing in India? It is not just trade financing that we do. We look at it from their balance sheet, their fundamental financial strength, and we assess a limit for that. And this is where the opportunity lies for financing. We need to finance transactions and not finance the company. All of us are bankers and all of us know this, but we all set up a limit for a company by looking at their financial statement. You are absolutely right that these companies are unable to give us the security or comfort of what we need. But they have a transaction on hand, which looks good enough to finance. That can be picked up and financed.
Bhandari: SMEs in the auto sector, even one level below to the dealers and suppliers, are able to have all the benefits about which we are talking. There are only a few banks which are doing it and I believe that this needs to be extended.
Ganesan: The auto sector is a simple one for financing, You can finance the downstream sectors on a transaction basis.
Gupta: Similar to what has happened in the auto sector, we need to look at creating financing solutions within specific ecosystems, as one size fits all will not work. Financing structures that link the corporate with its dealers and vendors is a more secure and scalable model to work with. As mentioned by Shekhar, in the GST regime, the data can provide an important bridge towards this.
Kumar: This will change the moment blockchain comes into being. It becomes entirely transaction financing; it does not become balance sheet financing at all. That is where we are heading to.
GTR: Generally blockchain is a hot topic everywhere in trade finance. How much progress has been made on that front in India, and do you view it as being potentially revolutionary?
Kumar: I don’t know the next logical step, because blockchain is still being debated. If blockchain is coming to stay, we need to build processes around it. The government and regulators are trying to set up a working group to create the documentation needed for blockchain and trade.
Verma: As well as partnering with each other, several banks are partnering with fintechs to innovate and bring technology solutions to customers. There are process teams working on use cases. Mostly, people are looking at use cases around trade, although this can be applied to many other scenarios. It is remittances, it is letter of credit, or it is supply chain open account. This bifurcated conversation, which is happening in a group of banks, is not moving in a very direct way and may not be sustainable. The RBI is floating a paper. They are seeking responses from various blockchain providers to understand the various technologies so that they have one central body which champions the cause.
Kumar: What will that trigger be? That gives rise to a situation where fintechs come into play. They cannot do a standalone solution – they have to collaborate with banks. That brings us to how fintechs are going to improve the processes of the bank and the cost. While there is plenty of opportunity for traditional banks and fintechs to co-exist, we need to wait and see whether they are going to be collaborators or work in isolation.
Bhandari: Blockchain, if well executed, can be the next big thing in the field of banking.
Kumar: It is only a matter of time. People are starting to fund these start-ups and then we will see the true emergence of blockchain.
Somasekhar: The only concern is when the authorities want copies of the documents from the banks. We will not be able to provide any documents.
Ganesan: If you go anywhere today, anyone accepts a digital document. For a regulator or an enforcement body, it is so simple that they can be party to it.
Kumar: The critical part which follows this is how well are you digitally skilled to do this? Are we competent enough to deal with the blockchain structure?
Gupta: If adoption of smartphones in the country is a benchmark to go by, businesses are sure to embrace blockchain, as users are very comfortable in adapting new technology. No one wants to be left behind. Most banks are exploring blockchain and working with technology partners to implement solutions across use cases, mainly in areas of cross-border and inland trade and remittances.
Rastogi: Before 2010, not much digitisation happened in trade finance. We always believed that everything would get digitised, but that nothing could happen in trade finance. Now suddenly we are saying that there is the potential to blockchain the entire landscape.
Ganesan: As trade bankers, what have we been doing? If you really look at it, there are only three things that we do as trade bankers: we do a settlement of the transaction, we handle documents, and we do financing.
Something has to change at the technology level in order to change the way everyone works in trade finance. Blockchain is going to enable a massive change. Whatever has happened in technology space, whether it is e-commerce or Airbnb, a technology platform provider has come in and changed the landscape. That is exactly the change which is happening in blockchain. We are having a technology that will immediately enable each and every player to adopt it, and I wouldn’t be surprised if the government will come in and we’ll get it done. Regulators will come in and lay out the rules of the game, and it will happen.
GTR: Are these conversations that you are having with your clients as well? Is there fear among the Indian banking sector that fintech companies and other online platforms may provide competition?
Bhandari: Fintechs have made the elephants dance. Banks are forced to put themselves into the fintechs’ shoes, and banks have either partnered, invested or outsourced them, only with the idea to take on fintech firms. I think fintechs came and they challenged the status quo.
Gupta: My belief is there is nothing a fintech does which a bank cannot do. Banks can do exactly the same. It is all about prioritisation. Banks have recognised that we can’t do everything at the same time, so let us partner with the fintechs to provide cutting edge solutions to the market, at high speed. Banks are running incubation centres and getting these fintechs to work on real life scenarios. Partnering with banks instead of trying to compete or replace them is a win-win situation.
Kumar: Fintechs killing banking is still an overstatement. It would take a major event of cataclysmic proportions to do away with banking institutions.
Ganesan: Uber and Airbnb only use a bank for the settlement of the transaction. They do not partner with a bank for development. It is just a technology platform. If there were a technology platform that could come in saying that it doesn’t need a bank at all except for settlement, that would be a very different way of thinking, and I think that is where we are headed to.
Verma: Each existing system must incorporate newer features and technology, or it will lose its relevance. Competition from non-banking firms has always existed, especially in trade finance. Banks need to create synergy with technology to keep themselves firmly rooted in turbulent times.
Ganesan: You don’t need banks to create platforms. What we have experienced is that corporates will look at what is right for them. Are they really going to get a benefit or are they simply improving the efficiency of the bank? As long as corporates see value for themselves, and that is the case at least with blockchain, they will be quite happy to invest.
Gupta: In his annual letter in 2015 Bill Gates noted that “we need banking but we don’t need banks anymore”. Perhaps not yet.
Ganesan: Banks are latching onto blockchain for survival. Otherwise, these technology players can supplant the banks. The only way they have to be in league with the banks is the stamp of regulatory approval which enables them to carry out banks’ activities.
Rastogi: I have a slight difference of opinion on this. Whatever examples we are talking about are all small ticket transactions. What about the big ticket transactions? I don’t think they will ever be able to cater to that, because we are talking about analysis, and we are also talking about funding in billions so that is where I feel the banks are ahead of the game.
Ganesan: If someone can finance US$5mn, they can finance US$5bn as well. It is a question of who can take what risk and how much money you put at risk.
Gupta: Though these startup companies have a great product proposition, the challenge they could face is getting clients to move billions of dollars through them in relation to their market cap. The issue is that for cross-border, it would be hard to take that risk on them to move money. That is what is going to keep getting in the way and hamper them in supplementing the banks.
Rastogi: The moment you go online it is difficult to have stickiness with the customer. You need to have the best solution. You come up with one solution, in a months’ time, it is outdated and someone has come in with a better one. Banks are moving at a pace which earlier was not there, and we have realised that we need to have the same kind of agility as the fintech companies. We need to adapt to that same culture. We cannot be sitting on one solution or proposal for a month or two months or three months.
Gupta: And that’s the reason why in most banks, IT is under the direct control of the CEOs, which is giving it the focus that is required. I think banks are moving quite fast.
Kumar: That is true and understandable for a private sector bank, but look at the larger public sector banks. I have known people who are reluctant to deal with technology. This is the challenge today in the public sector when it is trying to digitalise.
Bhandari: Look at the payment system change in India, this is a good case study for us. Some initiatives came from the RBI, following that, all the banks came together. Payments is where Indian banks are ahead of the world.
Kumar: That’s why I am happy that the RBI has made a formal acknowledgement of the emergence of blockchain. The Institute for Development and Research in Banking Technology, an arm of the RBI, is developing a model platform for blockchain. They are expected to establish some governance around this, which means blockchain is here to stay. They would never push private sector banks as they will adopt this on their own – they will certainly be pushing the public sector banks.
GTR: We could spend the whole day talking about these issues, but let’s move on to another topic. What have you seen around the local infrastructure boom and the associated demands for trade finance?
Bhandari: We are seeing the entire amount of investment actually happening. The banks in the sector and the outlay they are trying to have actively on the ground, and all of this comes into the trade bucket. I think you will find a bigger focus on domestic trade as a result of this investment.
Kumar: With our aspiration to become the third largest economy by 2030, and the dream of becoming the third best manufacturing destination, I think there is a lot to focus on infrastructure. The big promoting factor for us is the demographic dividend that we have had for the last two decades, and that is the area we are focusing on. We have had mishaps, but this is not because projects failed, but because of varying underlying factors. There is enough evidence to suggest that a substantial portion of the rise in impaired assets in the sector is attributable to non-adherence to the basic appraisal standards by the banks. Many banks did not understand the risks of long-term infrastructure financing. We are all short-term financing bankers. Our own skillsets were not ready.
The understanding is much better now. People have started learning after burning their fingers. Banks are working to understand the project engineering, they have project specialists now. Public-private partnerships, built-operate-transfer and hybrid annuity models are now being talked of.
Bhandari: The entire framework is being built up, and the new bankruptcy code coming in is very important. Every bank was thinking there was no regulatory recourse, and now the bankruptcy code came in to address that.
Kumar: This is precisely the reason people didn’t do equipment finance beyond three years. They did not understand the life of the equipment, they didn’t understand the technical spec of the equipment. There was a case of an earth-moving equipment which failed in 18 months while the tenor of the loan was five years. As bankers, we didn’t have the right technical skillsets when we extended finance on such machinery and equipment. Most infra and project loan appraisals were based on what were considered to be realistic assumptions, made against the backdrop of the encouraging growth trajectory. The growth receded, therefore, we failed. Today we are learning.
Bhandari: Initially, the borrowers were more knowledgeable than the lenders, which has changed now to the point where the lenders are equally knowledgeable. A lot of banks are more advanced in terms of analytics and knowledge.
Verma: This infrastructure boom can be seen in all sectors of the economy. Rs5.5 lakh crore is being invested in river interlinking.
Kumar: The government is also playing an important role in supporting the ports sector. It has allowed foreign direct investment of up to 100% under the automatic route for port and harbour construction and maintenance project. With these developments, you will see an uptick in trade finance. If the interlinkage of rivers and ports happens, the movement of goods becomes more swift and it saves money for the importer. Today, 80% of trade in India is financed. This will actually push that back.
Gupta: Not only ports, the government is pushing all sectors of infrastructure to a higher growth trajectory. The uptick in trade finance is directly correlated with the infrastructure growth. Banks which have participated in infrastructure financing have had challenges not because the projects were bad, but because of other underlying factors. Banks are now focusing more on cash flow financing and ring-fencing the implementation risks. I feel stability in the policy framework, and the capital markets opening up is also helping.
Rastogi: The RBI has also liberalised the export credit agency (ECA) requirement for infrastructure projects. They removed the caps.
GTR: By way of concluding, I am going to ask you each to take out your crystal balls for a prediction. If we were to gather again in five years’ time, how would things have changed?
Rastogi: Right now, we don’t have a very clear understanding, because the entire industry is undergoing a change and it will take some time to stabilise. The interesting thing is that you tie up with company A to do a project. By the time you complete that project, that company has been taken over two or three times. Then come the rules where you want to share the information with the final buyer of the fintech company.
Gupta: Banks will experience significant transformation in the next 10 years. On the trade side, there is no doubt that India will emerge as a strong trade partner for the rest of the world. The growing domestic consumption and high government focus on infrastructure development will facilitate high growth in trade volumes over the next five to 10 years.
Two, the traditional ways of acquiring customers, credit evaluation and operations will no longer be relevant. Artificial intelligence, big data and robotics will be more deeply embedded in our daily lives. Blockchain, digitisation etc will challenge the need for banking intermediation. All this could result in rebalancing the need for human capital in the banking industry and certain jobs getting replaced by technology aided tools.
GTR: Does this create social issues as well?
Ganesan: I have been saying for a couple of years that if you are not a technologist, you cannot be a banker for the future. Banking is going to be driven by technology, and all the guys will be doing far more technology-related jobs. AI alone can change the way that the back office works. The question is, what are we going to do as bankers? Revenue is going to shrink, because fees are going to shrink. The key benefit that you are going to get is to reduce the costs, because there is a huge cost with the number of people that you have. The real nectar is going to come from both an increase in terms of volume, but also the reduction of the costs.
Bhandari: I would paint a picture that if India in five or seven years is growing at a rate of eight to 10% per year, the biggest beneficiary within trade becomes the trade bank. The key factors are the people, processes and technology. In terms of technology, we have to be worried and be cautious about how artificial intelligence will be used or possibly misused. We are seeing a lot of investment in terms of money as well as people into that. I see many jobs coming on the technology side as a bank.
The second part is processes. In processes, most things are going to be automated or simplified, and we will be losing jobs there. But these will replace the data analytics which come into the picture. Machines can replace perhaps 60% of the processes such as customer services for example, but there are some things which cannot be done.
Kumar: The speed at which the jobs will be lost due to automation, especially digitisation, and the creation of new jobs will not be the same. There will be a lag. I fear that looking ten years hence, there could be social unrest unless we have a system that caters to that. We have to prepare the next generation. The government has a real job on hand, they are increasingly finding out, the level of literacy and skilling is poor. So they will have to bring in tough policy decisions to reshape the economy and prepare for an uncertain future of employment, otherwise there could be social unrest in a country with 1.2 billion people.
Verma: I am very confident that we will have very good growth. We expect the economy to grow rapidly within the next five to ten years because we have the best test demographic profile. On the banking and technology side, there is going to be a fully-fused banking and technology business. On the trade side, I see a lot of investments done by our neighbour China in this space, whether it is the infrastructure they are creating via trade corridors, or the access that they have with their investment in Africa. I see that India is also enhancing its co-operation with Africa, East Asia and the Middle East, which will establish its position in the global sphere.
Somasekhar: The key is the skillset. Given that the current policies by the government are favourable, we should be able to take off at a very rapid pace to ensure that we can see substantial growth in trade finance.