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How international factoring licensing can benefit MSMEs and boost the Indian economy


The International Financial Services Centers Authority (IFSCA), established at GIFT City Ahmedabad, has floated guidelines to set up International Trade Finance Service (ITFS) platforms for facilitating Trade Finance between Exporters and Importers, through Financiers from anywhere across the globe.

This is a significant development for the Indian economy, and will create far reaching impact in two distinct ways:

  • It has the potential to become a driver for Indian exports – which many consider to be the engine of growth that will power India’s economic recovery
  • Equally important, these ITFS platforms are unique in the region, and will place India in an exclusive club of global financial hubs.

Opening the world for Indian Exporters

Nearly 50% of Indian exports are contributed by MSMEs. Many of them have steady, stable, business relationships which they have been servicing well over the years. And yet, growth has always been a problem for MSMEs, who are often unable to build on and expand on their existing business. One of the reasons for this is that MSME exporters are constantly weighing growth opportunities against default risks, especially with more and more buyers preferring open account trade. MSME Exporters (and importers) do not have a wide choice of lenders, often being limited to their existing banking relationship in their own country. They have little ability to discover or be matched to more suited financiers from other countries, or to borrow in foreign currencies at affordable rates. Even when funds are available the paperwork and documentation can become cumbersome and time-consuming.

That’s where ITFS can make a huge difference. The digital ITFS platform will bring together exporters, importers and financiers from across the globe and will transform the way cross border trade financing is accessed. Through a live auction process, buyers and sellers can get the best price discovery, safeguarded by a strong legal framework that will minimize information asymmetry and risk. So, an Indian exporter will suddenly have a wide array of financiers bidding for their trade through a transparent mechanism – and it will no longer be surprising to see a brassware exporter from Moradabad accessing finance from an MNC bank’s New York office. The other big change will be in the efficiency of the process. With all documentation digitized, disbursal will be swift and simplified thus freeing the MSME of several pain points that have always hampered their growth.

Opening India to the world

As per a report of the International Chamber of Commerce (ICC), as the world recovers from the devastation caused by the pandemic, $5 trillion working capital will be required in the trade credit for a V-shaped recovery if merchandise trade volumes are to return to close to 2019 levels in 2021. Newer alternatives will be required to provide liquidity and access.

The ITFS platforms that will be set up do not have similar or comparable counterparts anywhere in the region. At the same time, the platform will be open to Exporters, Importers or Lending Institutions from any country. So, through this platform, an exporter from Bangladesh, sending goods to a buyer in Canada, could access finance from a lender based in the UK. This means that if properly marketed the ITFS platform could become not just a catalyst of growth but an important driver for India’s business image in the region and across the world. With more and more countries looking for trade alternatives to China, this attention and interest on India could be a gateway to trade opportunities for Indian business

Challenges

While a trade exchange regulated by international rules that offers a range of financing options is a welcome development, there will be several challenges that will need to be addressed to realize the full potential of ITFS.

The technology and customer experience must be able to live up to the promise of speed, simplicity, and transparency. The platform must have the highest standards of reliability and the process of access and transacting should not be a deterrent to the time starved MSME exporter.

The success of the platform depends a lot on being able to attract large numbers of buyers, sellers and lenders from across the globe. Businesses are notoriously slow at adopting new technology however attractive it may seem, usually preferring to take a ‘wait and watch’ approach. Therefore, it is incumbent on the four license holders to market their proposition robust to ensure active participation

Education is also key to sustaining the momentum. Not all MSMEs are tech savvy and many of them have small teams. Hence, mechanisms for handholding and constant guidance needs to be in place from Day 1, to ensure success stories are created right from the outset.

(The writer is Head – Marketplaces, Vayana Network)

(The one-stop destination for MSME, ET RISE provides news, views and analysis around GST, Exports, Funding, Policy and small business management.)

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