Anushruti Singh
In today’s market, goods flow seamlessly from one corner of the world to another. However, behind this seamless exchange lies a complex web of financial instruments and solutions collectively known as trade financing.
It can aid businesses through mechanisms like letters of credit, trade credit insurance, and supply chain finance. But it’s not just about providing cash. Trade financing also mitigates risks. For example, imagine a tech start-up in India exporting its innovative gadgets to the United States. What if the American buyer defaults on payment? Trade finance solutions like export credit insurance ensure that the Indian start-up gets paid even if things go awry.
Over the years, trade finance has played a significant role in making India’s economy the way it is. And now bank-mediated transactions account for more than a third of global trade, or trillions of dollars annually. According to MordorIntelligence, the India trade finance market is estimated to be at USD 2 billion in the current year and is witnessing a growth rate of 8.15% during the forecast period. Also, the Indian trade finance market is also increasingly changing due to blockchain, IoT, AI and ML usage.
To shed light on this complex yet vital sector, we spoke with Alvin Ho, President of Air8, about the current landscape and the future trends in trade financing, particularly for small and medium-sized enterprises (SMEs) in emerging markets.
Edited excerpts:
What are the primary challenges faced by SME suppliers, especially those in emerging economies, when it comes to accessing trade finance?
Small and medium-sized enterprise (SME) suppliers in emerging economies encounter several challenges when accessing trade finance. One significant hurdle is the limited availability of financing options, which constrains their ability to expand operations. Additionally, many SMEs lack the expertise needed to effectively manage working capital, further complicating their financial situation. They often find themselves caught between suppliers demanding short credit terms and customers requiring extended credit, creating a challenging working capital gap. Moreover, navigating the cumbersome loan application process at banks proves to be time-consuming, with lengthy turnaround times adding to the frustration of SMEs seeking financial support for their business endeavours.
What are some recent innovations or advancements in trade financing that are particularly relevant for SME suppliers in emerging markets?
Recent innovations and advancements in trade financing have introduced solutions specifically tailored to meet the needs of SME suppliers in emerging markets. One notable development is the emergence of technology-based supply chain finance platforms, offering agility and streamlined onboarding processes, reducing paperwork burdens for SMEs. These platforms facilitate efficient financing by leveraging digital tools, enhancing accessibility for smaller businesses.
Furthermore, trade financing platforms now integrate industry-specific insights, providing SME suppliers with valuable market visibility. By staying informed about market dynamics and gaining insights into buyer behaviours, SMEs can proactively manage the risks associated with their supply chains, ultimately fostering stability and growth in emerging markets.
How do regulatory frameworks, both domestically and internationally, impact the availability and accessibility of trade finance for SME suppliers?
Regulatory frameworks, both domestically and internationally, impact trade finance for SME suppliers in the areas of risk perception, adherence to compliance, and AML/KYC requirements. Also, trade finance-specific rules may increase the difficulty of accessing trade finance for SMEs. Due to the limited size and financial profile of SME suppliers, regulations such as increase of capital adequacy ratio, liquidity requirement, and provision of collaterals make it more difficult to access the funds that they need.
What are the key compliance challenges faced by financial institutions and businesses involved in trade finance, and how can they be addressed to facilitate smoother transactions?
Financial institutions typically rely on traditional credit underwriting methods, heavily emphasizing financial data. However, they encounter various challenges in acquiring sufficient data from SMEs to make informed credit decisions. Additionally, these institutions often lack industry insights necessary to comprehend the unique risks associated with SMEs’ operating sectors.
Moreover, many financial institutions find it costly to manage the entire loan lifecycle for SMEs, considering the return per loan facility. Consequently, technology-based, data-driven supply chain finance platforms offer solutions to these challenges. By leveraging both alternative data and financial information, these platforms are better equipped to assess underlying risks, enabling financial institutions to finance these assets with greater confidence. Furthermore, they streamline the Know Your Customer (KYC) and onboarding processes for SME suppliers, thereby reducing financial institutions’ costs associated with serving SMEs.
How do macroeconomic factors and policy decisions, such as changes in interest rates or currency fluctuations, influence the availability and cost of trade finance for SMEs operating in India?
Macroeconomic factors and policy decisions, such as interest rate changes and currency fluctuations, significantly affect the accessibility of trade finance for Indian SMEs. Higher interest rates make borrowing unfavourable, limiting access to financing and currency fluctuations impact competitiveness and the cost of operations. These factors collectively influence SMEs’ ability to access trade finance, affecting their competitiveness and participation in international trade.
How should MSMEs choose the right platform?
When it comes to selecting the right platform, MSMEs should follow a series of steps to ensure that they make the best choice for their business. Firstly, they should thoroughly review and assess the platform’s compatibility with their specific business needs and operations. Understanding the platform’s financing options tailored for SMEs and its ability to provide supply chain visibility is crucial.
Additionally, evaluating the platform’s scalability to accommodate future growth and expansion is essential for long-term success. Assessing the efficiency and simplicity of the onboarding process helps minimise disruptions to operations. Moreover, ensuring that the platform demonstrates a thorough understanding of their business, and their buyers’ needs is important. Finally, reviewing testimonials or feedback from other SME suppliers can provide valuable insights into the platform’s credibility and reliability in providing financing solutions. By following these steps, MSMEs can make informed decisions and choose a platform that best suits their requirements for trade finance.
