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India’s government has commissioned a wide-ranging review of the country’s trade finance sector, including examining the role of export credit agencies and the possible introduction of laws recognising digital trade documents.

The Ministry of Commerce and Industry believes a lack of trade finance is holding India back from achieving its target of exporting US$2tn-worth of goods and services by 2030, more than double last year’s figure of US$765.6bn.

In a tender document issued in January this year, the commerce ministry sought a “knowledge partner” to “benchmark best practices in global trade finance and fintech, identify gaps in the current structure and propose policy recommendations and innovation solutions to enhance the overall efficiency and effectiveness of the trade finance ecosystem in India”.

Consulting giant EY won the tender to conduct the review and is expected to hand its findings to the government later this year, according to sources familiar with the study.

The commerce ministry says in the tender document that regulatory reform may be needed because Indian businesses, particularly MSMEs, still struggle to secure fast and affordable trade finance.

Commercial lenders “shy away” from trade instruments due to the perceived higher risks of cross-border transactions, the ministry says.

“Overall, the current state of the trade finance ecosystem in India is marked by significant gaps and shortcomings,” the document reads. “The availability of trade finance instruments, such as factoring and supply chain finance, is limited, which is a major impediment to the growth of businesses engaged in international trade.”

The commerce ministry is considering “merging trade finance policymaking and regulation under one umbrella” to spur “greater efficiency and effectiveness”, the document shows.

The government has also foreshadowed potential reforms of the state-owned export finance house Export-Import Bank of India (India Exim) and the Export Credit Guarantee Corporation (ECGC), a public trade credit insurer.

India Exim has “limited” reach and scope, and “it is perceived that it is unable to provide adequate factoring and other trade finance related services to private businesses on commercial terms”, the tender document says.

India Exim has traditionally focused on medium-to-long term financing for large firms, but since the Covid-19 pandemic, it has started to provide short-term products tailored for MSMEs, the organisation’s deputy general manager Rahul Mazumdar said at GTR India in Mumbai last month. The organisation also launched an export factoring subsidiary in August last year.

ECGC, the ministry says, supports around 20% of India’s merchandise exports but “needs to broaden sectors it lends to, improve turnaround time and adopt simplified procedures to ensure growth of [the] trade insurance sector in India”.

Commercial trade credit insurance is not widely used in India, and ECGC’s executive director Sristiraj Ambastha said at GTR India that the agency commands a 70% share of the country’s export credit insurance market.

The tender document suggests the government is considering tasking a government agency with overseeing the trade finance market or creating a new body to do so.

“Integrating trade finance activities under one umbrella can provide a more coordinated and centralised approach to trade finance regulation and policymaking,” the ministry says in the document, potentially enabling “targeted initiatives to promote access to financing, and align trade finance policies with broader trade policy objectives”.

The outcome of the study will be watched with interest. The current government of Prime Minister Narendra Modi – who looks set to form a new coalition government following an election held between April and June – has shown a zeal for reforms in consumer and corporate finance, including the introduction of the Unified Payments Interface in 2016 and the Trade Receivables Discounting System in 2018.

But India still faces a steep challenge to meet the US$2tn by 2030 export target announced last year by trade minister Piyush Goyal.

Exports will need to more than double over the next five years, but rose only by 0.4% last year. Even that modest growth came solely from booming services exports – goods exports tumbled by 4.71%, according to commerce ministry figures.

 

Digital trade laws

In a boost to long-running efforts to move away from international trade’s dependence on cumbersome paper documentation, EY has also been tasked with suggesting “the required legal framework to enable digitalisation of trade documents/procedures”.

A decision by India to recognise digital versions of trade documents such as bills of lading will be a boon for efforts to digitise trade globally, and in theory allow at least partly paperless trade with some key trade partners.

Since 2018 a handful of countries, including the UK, Bahrain and Singapore, have passed legislation recognising digital trade documents, based on the Model Law on Electronic Transferable Records.

France is set to do so later this year while legislation or regulation in Germany and the US already allow the use of some digital trade documents.

“Establishing a comprehensive legal framework for the digitalisation of trade documents is a pivotal step towards modernising India’s trade infrastructure,” says Vishrut Srivastava, managing director of Yodaplus, a Mumbai fintech that provides a digital trade document product.

“We believe this initiative will streamline trade processes, reduce operational costs, and bolster India’s position in global trade.”

Spokespeople for the commerce ministry and EY did not respond to requests for comment.