New Delhi, February 21, 2018 : An Exim Bank’s Study entitled “Revitalising Trade Finance: Development Banks and Export Credit Agencies at the Vanguard” asserts that the role of Multilateral Development Banks (MDBs), Export Credit Agencies (ECAs) and national Development Finance Institutions (DFIs) will be crucial in bridging the trade finance gap, as also in catalysing private finance. These institutions can expand the scope of existing collaborations in areas such as co-financing, insuring of loan exposures, and reinsurance of guarantee exposure.
The publication was released by Mr. Arun Jaitley, Hon’ble Finance Minister, and Minister of Corporate Affairs, Government of India, during the Inaugural Session of the 41st Annual Meeting of the Association of Development Financing Institutions in Asia and the Pacific, held at New Delhi on 20th February 2018.
Exim Bank’s Study analyses the recent trends in trade finance, challenges pertaining to trade finance flows, and strategies which can be adopted to reduce the large deficit in global trade finance. Currently, the global trade finance gap is estimated at nearly US$ 1.5 trillion, with 40 percent of the gap existing in the Asia Pacific. According to the Study, trade finance gaps in developing countries have exacerbated in the aftermath of Global Financial Crisis. This has emerged not just from the dearth of liquidity in the system, but also from the stringent regulations and compliances during this period. The financial sector has responded to this by reducing exposure to firms and geographies which are small and have higher perceived risk. The response of Development Banks and Export Credit Agencies (ECAs) has been pivotal in restoring balance, and financing transactions which would otherwise not have been financed. According to the International Chamber of Commerce 2016 Global Survey on Trade Finance, nearly 75 percent of respondents reported that Multilateral Development Banks (MDBs) and ECAs help narrow trade finance gaps.
The Study highlights the stabilizing role played by ECAs in terms of easing the financing terms and increasing the supply of trade finance. In the aftermath of the Global Financial Crisis, involvement of ECAs in trade transactions ensured that exporters were able to offer their goods and services on open account terms in an environment characterized by heightened risk.
MDBs have also set up several programs which provide risk mitigation mechanisms to both issuing and confirming banks and allow for rapid endorsement of letters of credit – the main instrument used to finance trade transactions. As the global financial institutions are cutting down their lines of credit for trade, the supply for trade finance support from MDBs has witnessed an increase. An analysis of trade finance facilities of MDBs indicate that the trade finance programs of major MDBs supported nearly US$ 110 billion worth of transactions in 2016.
The Study also deliberates upon the prospects for cooperation by way of new initiatives such as establishment of regional trade finance facilities, and regional financing mechanisms like an Asian Exim Bank, while suitably leveraging emerging technology platforms such as blockchain to augment the availability and reduce the cost of trade finance.