As India’s exporters adapt to changes in the global economy, trade financiers jostle to try and stay ahead of developments. Siddharth Poddar reports.
Despite the slowdown in the west, India has continued to see annual growth in trade, with the exception of 2010, when both imports and exports registered a year-on-year decline. According to the Reserve Bank of India, Indian imports increased to Re23,460bn (US$432.9bn) in 2012 from Re16,835bn the year before. In the same period, exports out of India increased by 27% to Re14,59bn.
The World Trade Organisation reports that India’s share of global imports increased 0.8% in 2000 to 2.5% in 2011. Its share of exports increased from 0.7% to 1.7% in the same period. Despite this growth, industry practitioners maintain that it could have been higher had it not been for certain problems in the country.
“There are sectoral issues and there are generic challenges like infrastructure, right from the supply chain to port connectivity and airport and seaport capabilities,” says Munindra Verma, president and country head of India, trade finance and services at YES Bank. Verme adds that the transaction cost for exporters is much higher in India than in many other countries at similar levels of development.
Another factor affecting Indian exporters is the high rupee. Verma says the dollar-rupee exchange rate has moved about 8% from April 2012 to April 2013, “with significant intermittent volatility”. Banks in India consider exchange rate volatility when extending trade finance. Verma explains that when volatility in the one-year period is close to the interest rate differential, short-term volatility or a spike is a matter of greater concern. “We had these challenges in the 2012/13 financial year,” he says.
Banks are cautious about exchange risk and this concern is all the more prominent when small and medium enterprises (SMEs) which have relatively lower absorption capacity are involved.
At the SME level in India, financial institutions are not doing enough to meet the demand for trade finance, practitioners say. Sripad Murthy, director and head of financial institutions trade sales India at Barclays India, says “developed countries such as the UK, US and Germany have been more successful in aiding the SME sector through dedicated lines of credit”. In Asia, on the other hand, the support continues to be more sporadic and often, “the high cost of financing has been detrimental to the growth of the SME sector as well as the economies”.
However, there are signs that there is at least an acknowledgement of this in the Indian market. In February 2013, India’s IDBI Bank signed a memorandum of co-operation (MoC) with the Export-Import Bank of India to extend a variety of facilities and services to the country’s SMEs. According to the MoC, the two banks will co-finance and syndicate loans in domestic and foreign currencies, extend short-term credit and long-term loans to export-oriented companies, and finance export-oriented projects.
Amit Roy, head of South Asia at the Italian export credit agency (ECA) Sace, which has an India exposure of more than US$1.3bn, believes that as a result of conflicting data from the US and continued problems with the euro, there has been a conscious move by Indian exporters to diversify. These businesses are now looking more aggressively at markets such as Latin America and Africa.
Separately, while Indian exports largely comprised of raw materials and jewellery in the past, the product basket has now also been expanded to include pharmaceuticals, automobiles and engineering goods.
India’s exports to Europe have declined more than those to other regions, while India’s trade within Asia continues to rise consistently. Its exports to Association of Southeast Asian Nations (Asean), for instance, increased more than six-fold from US$6.7bn in 2000 to US$46.5bn in 2011, according to YES Bank. Imports from Asean increased from US$3.4bn to US$28.3bn in the same period.
According to Murthy at Barclays, prominent industries being backed by financial institutions today are ferrous and non-ferrous metals such as steel, copper and aluminium, cement, petroleum products, petrochemicals, fertilisers, chemicals, agro-based commodities such as sugar, rice, edible oils and the services sector (including IT and business process outsourcing). A few of the sectors banks are more reluctant to back in the current environment include shipping and ship-building, infrastructure, telecom services, aviation and real estate.
From an ECA perspective, infrastructure is increasingly important, says Roy at Sace. India has huge infrastructure requirements and banks have traditionally been an important source of finance for the sector. But given the fact that the country’s bond markets are not developed, ECA financing is set to become an important counterparty.
In March this year, the US Exim issued a US$9mn direct loan to Sai Maithili Power Company for a solar photovoltaic project in Rajasthan, India. This loan was for the purchase of thin-film solar panels from the US.
Similarly, the Japan Bank for International Co-operation (JIBC) signed an export credit arrangement with JSW Steel in India. According to the arrangement, JBIC and Mizuho Corporate Bank will co-finance a loan totaling US$53mn which will be used to purchase a steel-annealing line and other related services.
Overseas institutions are becoming more prominent on the Indian trade finance landscape. According to Aashish Pitale, group treasurer at Essar Group, the credit risk appetite of banks has been wavering due to fears of turmoil in various parts of the world. “These factors are leading to frequent impairment in the smooth functioning of global money and credit markets,” he says. Despite this, the trade finance teams of some banks have been spotting opportunities, building workable cross-border trade structures around such opportunities and marketing them to the clients, he adds. Similarly, corporates have also been leveraging the cross-border trade finance channel in pursuit of value.
Pitale says many foreign banks have applied for branch licenses in India and are showing a lot of interest in trade finance products. As international banks extend their operations in Asia, there is bound to be risk diversification in the system and to that extent it would be easier for companies to raise finance.
Organisations formerly active in India are also continuing to back businesses in the country. In February, US Exim signed a US$500mn memorandum of understanding with ICICI Bank, pledging to co-operate on financing projects that are beneficial to both India and the US. The two banks see opportunities in areas such as railway, urban metro development, port development projects, power generation, oil and gas projects and water treatment projects, among others.
There are likely be larger shifts in trends once Basel III regulations are implemented in India, but that is still some way off as mandatory implementation is only set for 2018/19. Murthy believes that the method of evaluating counterparty risk will undergo change, leading to higher capital charge, particularly for lower credit quality.
This could also potentially lead to higher transaction costs as banks will look to recover the cost of capital and earn a decent return on the higher capital outlay.