India has set itself a target of hitting US$2tn in total exports by 2030, a lofty goal for a country that only exported US$765bn-worth of goods and services last year. But the nation is in a period of transformation, with many government initiatives underway aimed at making India a trading powerhouse and easing access to finance for its SMEs.
On the sidelines of GTR India in Mumbai in May, we assembled a group of senior trade finance bankers from Indian and international banks for a roundtable discussion that covered India’s evolving strategy on free trade agreements, the path to digitalisation and how banks can compete with agile fintechs.
Roundtable participants:
- Bharavi Cheerla, head of trade and supply chain finance – India, Bank of America
- Dimple Chitnis, national head of sales and product – trade finance, supply chain finance, bullion, FES, Yes Bank
- Sanjay Desai, general manager, Asia, Supply Technologies (chair)
- Mayank Gupta, head of trade and working capital solutions, Asia South, Citi
- Sunil Jain, head of trade products, HDFC Bank
- Sanjay Kumar, product head – structured trade, ICICI Bank
- Tarandeep Singh Lamba, head of trade products, transaction banking, Standard Chartered
- Yoshitaka Morita, head of global trade finance department, Asia Pacific, SMBC
Pictured from left to right: Sanjay Kumar, Tarandeep Singh Lamba, Mayank Gupta, Dimple Chitnis, Bharavi Cheerla, Sunil Jain, Sanjay Desai, Yoshitaka Morita.
Desai: How has the landscape for trade evolved and what has been the impact on Indian exporters and the appetites of banks and non-bank financial institutions?
Chitnis: Trade businesses, not just in India but globally, have gone through a lot of transformation. Exports are growing, particularly on the services side, which creates very big opportunities for banks like us. It also gives us a window to educate clients that are providing services to global markets. IT, travel and tourism, medical and hospitality are all poised for very large growth. E-commerce is a substantial opportunity in the trade space. I’m very proud to say that Yes Bank was the first bank to go live with [Brazilian payment platform] Ebanx following the payment aggregator cross border regulation – the first initiative the Reserve Bank of India has made for corporates and banks to really grow in the e-commerce space. Over the next five years we’re looking at US$50-60bn in throughput, and today we’re still at around US$1bn, so it’s important we have the right digital framework in place.
Jain: To add some perspective, over the last decade India’s share of global services exports has grown much faster in comparison to India’s share in global merchandise exports. In absolute numbers, India’s services exports have almost doubled during this period. More broadly, the trade landscape has been driven by four key elements. The first two are global in nature – geopolitical events and the Covid-10 pandemic – which have brought India closer to the centre of global supply chains. The other two are domestic drivers: government initiatives such as Make in India, and enhanced and renewed focus on free trade agreements. These two initiatives complement each other.
Going forward, as we know, India is targeting US$1tn of merchandise exports and another US$1tn in services exports. This will obviously create financing requirements which banks and financial institutions have to take up. Through digital solutions for onboarding, underwriting and disbursement on one side, and alternate risk mitigants like insurance and using India’s data stack on the other side, banks are gearing up to take up the potential capacity.
Desai: The free trade agreements (FTAs) that have been signed in the last five years or so, for example with South Korea, Thailand and the UAE, will have an impact on cross-border trade. What do you think they mean for fresh trade flows and opportunities for banks, as well as for non-bank financial institutions?
Cheerla: India is not new to signing FTAs. Between 1975 and 2011 India signed 13 agreements, but have they been successful? I think the statistics speak for themselves: less than 20% of exports to these countries have qualified for any benefits under FTAs, and while exports to those countries have increased by 30%, imports from the same countries have gone up by 80%, so clearly something has gone wrong. Most of these FTAs are with countries in East and Southeast Asia, which are very heavy on manufacturing, so we literally played to their strengths instead of trying to figure out where our capabilities lie and how to build our strengths. But the government woke up to the lacunae in FTA processes and there was a lull in new agreements for over 10 years. From 2021 onwards, there have been FTAs signed with Australia, the UAE and some EU bloc countries, and the government is considering re-negotiating some of the earlier deals. The government now has a focus on supply chain resilience and diversifying supply chains as much as possible, as well as looking to Western and African export markets, instead of just looking east.
What does it mean for banks and exporters? From the exporters’ perspective, there is a very consultative approach by the government. Industry associations are involved in advising the government. Exporters will see this as a window to extend their supply chains across newer geographies, to bring more depth into their supply chain processes.
From the banks’ perspective, it clearly means we should be aware of developments being driven by FTAs, which new geographies are being targeted, and that there will be much more cross-border trade financing opportunities for banks. Banks with global networks, and with global correspondent bank networks, will be able to leverage the shifting supply chains driven by FTAs, build solutions and support the exporter community. FTAs will be a key driver for exports going forward, which in turn will be a key driver for India targeting its US$5tn GDP status.
Gupta: The government has smartly overlaid the FTAs with the Make in India campaign and production-linked incentives (PLI). PLI is going to bring a lot of capital into the country; we are soon to be the largest manufacturer of iPhones in the world. We will also soon be a powerhouse on a lot of new economy products such as solar cells and EV batteries, amongst others. As that happens, two things will take place. Firstly, the FTAs will play to our strengths, which means we’ll have disproportionate access to various markets to sell these products. But secondly, there is also a big downstream impact. People are going to build their procurement supply chains in India, which means you will have the benefit of MSMEs providing to these exporters. As we know, MSMEs are the largest employers in the country. If half of India’s working population is employed by the MSMEs, and grow off the back of Make in India, it will bring both benefits: capital inflow through PLI, and employment through the growth of MSMEs. At the same time, the government is encouraging fully digitised and data-led provision of financing. If you think about the whole ecosystem, the government’s being extremely sharp. They’ve opened up the global market, they’ve enabled the MSMEs and they’re now sitting back and realising the fruits of it.
Kumar: I would like to add that apart from trade, FTAs are also intended to bring in investments. In each and every FTA, there is a commitment to how much foreign direct investment will be brought in to create the infrastructure for greater exports, and by when. This brings in new technology and innovation.
After the coronavirus, MSMEs in sectors like IT management, AI tools and data analytics have seen their overseas orders coming in and helped fuel the growth in services exports we have discussed. There is a lot of scope for lending, however so far we have not seen service exporters applying for working capital facilities, because obviously they don’t require it. Secondly, on the MSME front, everyone has talked about balance sheet assessment. I think most of the banks in India have dispensed with the requirement for balance sheet assessment and risk management for underwriting, because of the e-invoice and GST returns. For MSMEs, most of the banks have adopted systems and tools for assessing their requirements based on the underlying data. Even if balance sheet assessments are still being used in some way, I think they will be done away with going forward.
Desai: Indian banks and financial institutions have a lot of access to many financial solutions. What open account financial solutions are emerging as key for Indian banks to support domestically as well as internationally?
Lamba: Traditionally, most trade banks in India and globally have been more comfortable with documentary trade and working with instruments such as guarantees. For MSMEs, historically going to a bank and taking a loan was considered open account. That process has evolved to use performance and transactional data, instead of balance sheet, to assess that segment of clients. There has been a big uptick in that space, including co-operating and co-competing with fintechs. We are now seeing ecosystem financing, which is essentially financing done on the back of a strong counterparty. A good example of that is the Trade Receivables electronic Discounting System, which has been a big flavour of the Indian market for the last six to seven years to the extent that it’s crowded out a lot of mainstream banks. We are now seeing more models evolving at the top of the pyramid, such as structured trade finance, where very bespoke structures being developed. They are very new to the market, and not just the Indian market but also globally.
Desai: India is still not very aggressive on deep-tier financing, compared to China. What do you think separates the two markets, particularly regarding the technology available in that respect?
Morita: Generally in China, financial institutions use third-party technology platforms. In some cases they invest in them, but they run separately. The stronger anchor buyer uses the platform to build the programme, because for them, securing the value chain is more important than just investing in the technology. Supporting financing to SMEs and the various layers will secure its value chain and the completed manufactured products. The deep-tier supply chain financing you see in China can potentially work in India, because a traditional way of financing SMEs is difficult. In China, they have started doing deep-tier supply chain finance in multiple layers. There’s an assignment of receivable for many, many layers, we even saw it up to 23 layers, and it’s a sort of tokenised receivable assignment. The legal framework must be there, but technology is also needed. While for us, as a financier, what is required in this ecosystem is who is responsible for managing the risks in these systems; when problems arise, who is supporting the financiers? In China, the successful model is probably that the anchor buyer takes care of the system risks. The government in India would have to play a significant role to enable similar success in India.
Desai: India has made a lot of improvements in technology everywhere, on the consumer and banking and industry side. What does this digitalisation roadmap look like over the next five years and what impact is innovation having in terms of pushing it forward?
Chitnis: The fundamental question I always ask myself is, why do fintechs survive in this space? What is it that sets fintechs apart from bankers? It is the innovation, it is a platform, it is digitisation. They have understood the pain points of what a corporate faces, and have created solutions for them, often damn good solutions. Let’s face the reality – banks are now at the receiving end. There are corporates who insist on us using their existing fintech partners for transaction banking business because of the customised offerings, interoperability and one-stop solutions provided, therefore we collaborate with those fintechs.
In India we have the Digital Public Infrastructure (DPI), and there is discussion of other countries adopting that as well. If that’s going to be available for our trade partners, isn’t that an opportunity for me as a bank to leverage and play on? For me, digital or ecosystem banking cannot be just digitising one leg of the journey. Currently, our digitised journey for corporates is still in bits and pieces. What I think is going to be the game changer for the trade finance business is access to information, transparency and documentation, access to acceptance – not just globally, but also from a domestic viewpoint and managing supply chains.
Jain: Before Covid, the pace of digitalisation in trade was steady, both in India and globally. A few examples of landmark developments in India are the digitisation of shipping bills and bills of entry for cross-border trade, and the introduction of e-invoicing and e-way bill for domestic trade. Since Covid, it looks like the pace of development has shifted to the next gear. On one side, banks are trying to speed up the process of credit assessment, underwriting and disbursement. On the other side, we have fintechs trying to bring solutions for the overall lifecycle of supply chains, from the payment order stage to financing and then to payment. But if I put everything together, I feel a lot of these developments have created data islands everywhere. If all the participants in a particular transaction are on one data island, the communication happens easily. But if someone is not on one island, but on another island, it’s very difficult to communicate. If we want to progress from here, we might need a common rail, maybe like what Swift did a long time ago for global payments between banks, or a plug-and-play solution irrespective of the platforms.
Desai: India has a target of reaching net-zero greenhouse gas emissions by 2070. How are banks and financial institutions prioritising ESG, and what impact is that having on trade finance services and solutions in India?
Lamba: For most corporates, ESG reporting is not regulated, but a subset choose to prioritise it for the optics dividend. For banks, the situation is different because we are very regulated. However, we still don’t have an ESG policy framework from the Reserve Bank of India, so there is no policy with which we all have to comply, although there is something in the works. From that perspective, is it a must have? No. Is it a good to have? Yes. Banks and companies are doing it but it’s in bits and pieces.
Some companies prefer ESG financing from banks. Either a bank is ready to accept or lower margin or a corporate is ready to pay a better budget to take funding under ESG; that’s the commercial aspect of it. But beyond that, more and more banks are also trying to publicise that they are doing more and more financing through ESG, on their own initiative rather than just because they are made to do so by regulation. I think this will have a phenomenal runway. There are frameworks expected, not just in the India context, but in the global context, where banks have to be given incentives, given some impetus when they do ESG-based funding, to get a capital benefit out of it. Unless you bring the carrot into it, it’s going to be very subjective and very sporadic.
Gupta: Another point is that there are multilateral agencies and development finance institutions whose mandate is to support various good-to-dos. The energy transition could be something that they would look at. Using those agencies, you substitute the risk of say, an Indian corporate, which is barely investment grade, with maybe the sovereign risk of the US or Japan. Suddenly, because you have access to that, you can make a competitive bid while meeting your internal return on capital hurdles and providing support. It doesn’t happen at scale, but it is getting better. With ESG, capital is critical. A company using a blast furnace cannot suddenly move to an electric arc furnace without the necessary capital; a bank will have to play a role. Whether the bank plays that role because it’s a must-do or a good-to-do, is the question. We are a for-profit organisation, so there will have to be some incentives that come to all. Maybe the incentive will be that our clients stop borrowing if we don’t do our bit. Maybe Unilever will have to make products without plastic as a wrapper, because the customers won’t buy it. Maybe that’s the incentive, but there’ll be something that will come. Maybe the market will evolve. Maybe the regulations will force them.
Kumar: In trade finance, ESG is very difficult to assess because of the difficulty of getting data on scope 3 emissions. Corporates are having a lot of challenges to fill in the scope 3 data points. Until the entire process is digitised, implementing ESG parameters in trade finance and supply chains will be very difficult, be it cross-border or domestic. Domestically, the RBI has encouraged green deposits and green lending, but I saw in a news report that the State Bank of India has asked the RBI to give green deposits the benefit of reduced capital reserve requirements. The question of how to incentivise those products is certainly evolving.
Desai: I’ll give you 20-25 seconds to make one statement: what do you think about India’s future in business, exports, as well as trade finance?
Chitnis: I think the next decade is going to be extremely bright. The government initiatives to build an impetus for trade business are going to be a game changer. The efforts are not just to create corridors globally across different official markets, but also digitalising the whole process. If this momentum continues, I feel India’s on course for pretty fantastic growth in the cross-border space.
Cheerla: One key factor for business, the economy and trade finance, is the overarching political stability which we finally have in place. This is for both capital expenditure investments by industrialists in India and foreign investors looking at India. This is what will make a difference in the coming decades.
Gupta: We spoke of fintechs, but I think the biggest disrupter has been the government. Because of the disruptions that are coming through in India, the landscape will change very materially. This means the competitive landscape for banks in the trade business will look very different. Some banks are going to really accelerate and hit the ball out of the park, and some banks will end up staying where they are. This next decade will change the banking landscape and the competitive landscape when it comes to trade. If you do this roundtable again in 10 years time, you’ll have a very different set of players around this table.
Morita: India is a fast-growing country. For exports, we mainly look east from India for now, but we are going to try to look west from India, so exporting to the Middle East and Africa, or exports through the engineering, procurement and construction business into the Middle East is, I think, a growing market and opportunity.
Kumar: As of now, the digital infrastructure created by the government of India is serving the government’s purpose. But there are a lot of proposals out there on how to harness that digital infrastructure to transform trade journeys and trade customers’ interactions with their banks. My last point is that I think India is going to achieve the US$2tn export between 2027 and 2028 – it may not have to wait until 2030.
Thank you to Standard Chartered for hosting the roundtable discussion in Mumbai.
