How structured trade finance solutions help MSME exporters & importers
India's MSMEs and their business owners are finding new-age digital start-ups and alternate lending platforms to be the most effective institution to disperse credit.
About 80-90% of world trade today relies on trade finance. It is one of the most reliable forms of financing with less than 1% of transactions facing default. Despite this, the global trade finance gap was estimated at US$ 1.6 trillion in 2016. For Asian developing economies alone, the estimated shortage is US$ 692 billion. The access to trade finance is further restricted in case of Micro Small and Medium Enterprises (MSMEs). According to a survey by the Asian Development Bank (ADB), rejection rates for trade finance applications are as high as 56% in case of Small and Medium sized Enterprises (SMEs). These rejections have far reaching effects on the overall economy as they cause trade financing gaps among developed and developing countries. Therefore, there is a major need for reform in the global trade finance policies for the growth and development of MSMEs all across the world.
Impact on overall GDP
In the last five decades MSMEs have emerged as a highly potent and dynamic sector of the Indian economy. They perform a major role in the economy by providing employment to a large number of unskilled and semi-skilled people, contributing to exports, raising manufacturing sector production and extending support to bigger industries by supplying raw material, basic goods, finished parts and components, etc. India’s MSMEs base is the largest in the world after China. As per the official estimates, there are about 63.05 million micro industries, 0.33 million small, and about 5,000 medium enterprises in the country.
MSMEs accounted for 30% of India’s GDP, 45% of India’s total manufacturing, and 40% of India’s exports in FY18. One of the major problems faced by MSMEs is the scarcity of sources of funds due to lack of financial inclusion. An estimated 75% of MSMEs secure funding through informal sources . Financial literacy is a consequential factor, since there is a lack of knowledge and awareness of appropriate banking finances designed for MSMEs. With change in policies and introduction of government reforms to streamline the flow of credit like Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), Micro Units Development and Refinance Agency (MUDRA) and Stand up India the scenario is changing slowly.
Challenges with conventional sources of finance
MSME’s are heavily dependent on the domestic market but there is a need to look beyond. With the wave of globalization MNCs /International companies are looking at the Indian market with keen interest, as a market as well as a source of finished goods. MSMEs have made use of this opportunity and are exploring overseas markets, leading to an increased demand for trade finance.
In addition to securing financing MSMEs also have to deal with the vagaries of shipping. The processes involved in shipping and financing are quite complex and tedious. The paperwork involved in securing and managing any type of loan is still daunting, but for trade finance, which is probably the most ‘in the moment’ kind of financing, speed is of the essence and when that speed is not there it’s particularly irksome.
Today, India's MSMEs and their business owners are finding new-age digital start-ups and alternate lending platforms to be the most effective institution to disperse credit. A report titled ‘Credit disrupted: Digital MSME lending in India’ estimated that in 2018, the total MSME credit demand would have been Rs 45 lakh crore, of which Rs 25 lakh crore would have been met through formal channels with the borrowing done in the entity’s or proprietor’s name. However, as much as Rs 20 lakh crore is seen as the unmet credit demand which is financed through informal channels . Thus alternate financing channels along with digitization are the need of the hour for MSMEs. In today’s scenario ease of doing things is prioritized and time invested is quite valuable. There is a need for solutions that increase efficiency and at the same time are sustainable.
Trade and Finance go hand in hand as processes, hence combining them is an obvious step forward. This makes for a smooth and effortless experience for those involved. The use of digital technology has had a huge role in the development of trade finance solutions. Blockchain is the next frontier for trade finance. Each block contains a cryptographic hash of the previous block a timestamp, and transaction data and thus, a blockchain is resistant to modification of the data. Some of the technologies that financial institutions are exploring in various domains is to digitise the lending process using blockchains.
Trade finance solutions – other alternatives that must be explored
Companies such as Blend Finance, Cargill Trade Finance, Interlink Capital, Kotak Mahindra, Meg Fin India provide offerings such as structured trade finance, equity broking and other such solutions to startups, SMEs and MSMEs. Maersk Trade Finance have been very active in offering a combination of trade finance and shipping solutions to the MSME sector since their inception in 2016. Such companies bring with them a knowledge of the underlying business that is probably difficult if not impossible for a traditional financial institution to replicate. Knowing what someone has been transporting in and out of the country for ten years or more gives a particular comfort in boosting that business. Based on that comfort a non - FI, can provide export or import funding to SMEs, mid-sized companies and of course to large corporates.
(The writer is Head of Implementation – Maersk Trade Finance.)