The excessive dependence of local banks on overseas branches via less standardised instruments restricts the scope of trade-credit operations. According to a Reserve Bank of India paper, banks should expand their global banking relationship and move towards globally welcomed trade finance instruments instead of indigenous instruments (such as letter of credit/letter of undertaking).
This, however, may increase costs, the paper stated. Domestic banks depend to a large extent on their own branches or those of other Indian banks , which have no issues in accepting non-standardised trade instruments such as LoUs and LoCs for arranging trade credit.
“The overdependence of domestic banks on their overseas branches through less standardised trade credit instruments limits the scope of their trade credit operations.” said Dhirendra Gajbhiye, Rajeev Jain and Soumasree Tewari of the RBI’s Department of Economic Policy and Research.
“The fall in trade finance intensity in recent years is clearly an indication of supply-side constraints. In particular, the financial health and size of overseas network of banks operating in India matter for trade credit,” the authors said.
As the sparse global financial condition has been discovered to hinder trade credit flows. The authors think that policy efforts towards supporting banks’ overseas business network may make these flows buoyant.