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Priya Nair

Mumbai, Sept. 29 The global economic slowdown and the subsequent revival have resulted in a rise in the demand for risk mitigation products such as Letters of Credit and bank guarantees.

Earlier, trade finance was moving away from such secured transactions towards open account transactions. But with the global liquidity crunch and exporters entering into new markets such products are gaining popularity once again, say bankers.

According to Mr Zuzar Tinwalla, Head, Trade Services, Cash Management and Client Services Group, India, Standard Chartered Bank, there has been a rise in risk management and risk mitigation in trade finance post September 2008. “Prior to that trade was predominantly moving towards Open Account terms. But now we are seeing a trend towards secured transactions such as Letters of Credit, bank guarantees, factoring and forfeiting,” he said.

An LC or a bank guarantee is an assurance from the lender that in the event of a buyer not being able to make payment on the purchase, or a debtor fails to settle a debt, the bank will cover it. For banks, it is an important source of fee income.

StanChart has seen a rise of about 10 per cent in LC-backed transactions in the last one year.

In the last one year, State Bank of India also has seen a rise of about two-three per cent in LC-backed transactions, after having seen a steady decline for 10-12 years, said an official in-charge of trade finance.

“LC exports had been declining, but that trend has reversed. We are seeing more inward LCs. While our exporters are not requesting for LCs, they are getting more LCs from importers,” the SBI official said.

According to Mr Bhriguraj Singh, Head Trade and Supply Chain, HSBC India, post September 2008 there is doubt about the credit quality of counterparties which were earlier perceived to be of high credit quality. This led to banks receiving a lot of requests for confirmation of LCs from their clients.

“Exporters have become more aware of counterparty risk. Consequently, we see an increase in requests for mitigation solutions. Many exporters who were earlier transacting on open account terms have moved to LCs,” Mr Singh said.

Another reason for the rise in requests for confirmation is Indian exporters moving onto newer markets, which meant working with counterparties and banks that they are unfamiliar with. This also led to an increase in demand for risk mitigation products such as confirmations and forfeiting, Mr Singh added.

“As a consequence of the credit crisis, there is now a greater awareness of risk. Earlier, the perception was that all banks were in a bad shape. But now, mitigation solutions are used to develop comfort with new buyers and banks,” Mr Singh explained.

In the current financial environment, the demand for secured transactions could see a rise for the next year-and-half as it depends on when the customer achieves a level of comfort with his counterparty again, Mr Tinwalla said.

More Stories on : Exports & Imports | Financial Services

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