Financial Intermediaries and Trade Facilitation in South Asia (FITF)

The project entitled ‘Financial Intermediaries and Trade Facilitation in South Asia’ was undertaken by CUTS with the support of The Asia Foundation under the programme ‘Innovative Approaches to Address a Specific Non-Tariff Barrier to Trade in South Asia’. This project will focus on specific barriers related to trade related financial services in bilateral trade between Bangladesh-India and India-Pakistan. The purpose of the project is to generate awareness on issues related to trade related financial services which affect bilateral trade and to explore trade opportunities that can be realized by addressing such issues, generating welfare outcomes for Bangladesh, India and Pakistan.

The financial regulatory authorities in various South Asian countries have been indifferent to trade finance needs and hardly attend to the problems faced by traders on account of default on payments and other aspects of trade finance. Many a times the principal financial instrument issued against a trade transaction, ‘letter of credit’ (LoC), by banks in one country, is not honoured by banks in another due to lack of obligations on mutual recognition between them. This regulatory divide poses serious payment-related risks. In this context, the specific NTB to be addressed in this project is stated as ‘lack of reliable and fast payment options to facilitate trade transactions’.

Incidence of cases of non-acceptance of LoC is mostly reported in the case of India-Pakistan and India-Bangladesh trade. Traders mostly rely on multi-national banks and indirect payments are routed through third country bank branches in the absence of indigenous banks in operation in trade financing sector. As far as the official positions of apex regulatory authorities in Bangladesh, India and Pakistan are concerned, specific regulations restricting payments are not enacted.

However, regulatory complacency has resulted in de facto restrictions on payments. For instance, the Reserve Bank of India does not prevent domestic banks from honouring payment instruments issued in either Bangladesh or Pakistan. However, lack of contractual relationships between banks from these countries is still an obstacle for creating a conducive environment for trade transactions. This project attempts to address this issue.

The duration of this project is of 10 months from September 2013 to June 2014.

SUPPORTED BY

A goal of the project is to instigate policy reforms for betterment of trade related financial services and thereby contribute to increase in trade volume between India and Bangladesh, and India and Pakistan in sectors with high trade potential which are affected by issues of trade finance and payments.

Specific objectives of the project are:

To work towards a mutual recognition agreement between India and Bangladesh on trade-related financial (banking) services to facilitate trade transaction and a similar mutual recognition agreement between India and Pakistan
To pave way for initiation of at least one new trade-related financial services instrument by India and Bangladesh, and India and Pakistan for qualitative and quantitative improvement in their cross-border trade in seven identified high potential product lines.

Activities and Outputs

With respect to trade barriers owing to lack of reliable and fast payment options to facilitate trade transactions, three important aspects are to be noted. Firstly, banks as service providers should be willing to better their trade finance services based on incentives. Secondly, a critical mass of clientele should be there as buyers of trade-related banking services for creating incentives for the service provider. Thirdly, improvements in the services should be such that they are not in conflict with the exiting guidelines of the apex regulators (central banks/finance ministries) in this regard. The activities planned under this project keep these three aspects in perspective.

In order to achieve the objective of improved trade financing services this project plans to implement to two broad sets of activities. They are as follows:

Focused Meetings between and among Acting Groups and Pressure Groups
Endorsements by Pressure Groups

Acting Groups will consist of a select group of senior administrators from among service providers (banks) and senior level officials belonging to financial service regulators as well as representatives of trade/business associations of sectors with high trade potential (Clientele Groups).

Pressure Group will consist of a select group of clientele belonging to high potential sectors and a larger set of stakeholders – key institutions and organisations which are deeply concerned and can be incentivised for better trade financing services and products.

Specific activities related to meetings between Acting Groups are:

ACTIVITIES	OBJECTIVES
Focused Meetings between Clientele Group	To take stock of the issues associated with trade financing and to frame a statement of demand for improved services.
Focused Meetings between Clientele Group and Service Providers	To reconcile the concerns of the demand and supply sides of better trade finance services and products.
Focused Meetings between Clientele Groups, Service Providers and Regulates	To frame and adopt an action plan with the consent and approval of the regulatory authorities.
Final Meeting (May 2014)	It will be conducted to represent project findings to the respective regulatory bodies acting in financial sectors of Bangladesh-India and India-Pakistan. A large Group of Stakeholders will be involved as Pressure Group (created by CUTS) to ensure that the action-oriented result from the primary set of activities is delivered appropriately.

To ensure that the primary set of activities in the form of focused meetings deliver expected results, a larger group of stakeholders will be involved as Pressure Groups. This Group will be formed by CUTS by involving representatives from key institutions and organisations which are deeply concerned and can be incentivised for better trade financing services and products. Representatives from apex business organisations including export/business/industry associations and associations of importers and trade-related services will form this Group. Influential personalities will be selected as ‘policy champions’ and will be entrusted to lead this Pressure Group. The mandate of the Pressure Group is to monitor the progress of the primary set of activities and guide the CUTS project team to do all that is necessary to achieve specific results of this project.

3rd Focused Expert Group Meeting between Clientele Group, Financial Intermediaries and Apex Financial Regulators
to address Lack of Reliable and Fast Payment Options to Facilitate Trade Transactions in South Asia
May 24, 2014, New Delhi, India

2nd Focused Meeting between Clientele Group and the Service Providers
On Lack of Reliable and Fast Payment Options to Facilitate Trade Transactions in South Asia
April 08, 2014, Dhaka, Bangladesh

Focused Meeting between Clientele Group
On “Lack of Reliable and Fast Payment Options to Facilitate Trade Transactions in South Asia”
February 20, 2014, New Delhi

Unnayan Shamannay, Dhaka

Sustainable Development Policy Institute, Islamabad

SAARC Secretariat to address risks of trade-related payments
May 24, 2014, New Delhi

Banks to be fined for failure to pay foreign parties for LCs
The Daily star, April 08, 2014

CUTS Centre for International Trade, Economics & Environment (CUTS CITEE)
D–217, Bhaskar Marg, Bani Park
Jaipur 302 016, India
Ph: +91.141.2282821
Fax: +91.141.2282485
Email: citee@cuts.org
Web: http://www.cuts-citee.org/