MUMBAI: Exporters will soon be able to realise export proceeds in days instead of weeks. Banks are working on dematerialising the letter of credit (LC) and documents that accompany it. As against the current practice where the exporter has to physically transmit the letter of credit among bank branches, LCs will soon be sent across bank branches in an electronic format to prevent practices of defrauding and ensure security.
The State Bank of India (SBI) and ICICI Bank have joined hands with the Indian Banks’ Association (IBA) to conduct a pilot project on trade finance. Through this model, banks will use the structured financial messaging system (SFMS) network for verifying trade-related documents.
The model expressly aims to avoid paperwork and improve the speed and efficiency of trade-finance related transactions. The other banks that are partnering with the IBA are HDFC Bank, Union Bank, IDBI and Central Bank of India.
Said a senior IBA official: “This would help improve the speed and efficiency of transactions involving disbursal of trade finance. As of now, it takes anywhere between a couple of days to a week’s time for a borrower company to get its documents verified because it entails physical movement of papers across different banks or even, different branches of the same bank. Also, for banks whose branches are already RTGS-enabled, this would not be expensive.”
IBA officials pointed out that this model could be extended to cover areas such as lines of credit, guarantees and bill discounting. The association is currently working out the details of procedural and operational norms for banks to implement the model. The IBA has also formulated a group comprising member bankers in order to examine the ways and means to extend SFMS, which is an alternative to the SWIFT system, to include applications such as instrument clearances and lines of credit requests.
Currently, 23,000 branches are already RTGS-enabled and hence, possess the digital certification and card readers needed for processing such transactions. Under the pilot project, these banks would send test messages to each other and deploy 10% of their individual branch networks in the project. For non-RTGS enabled branches, banks will have to shell out a fee towards procurement of the digital certification from the Institute of Development and Research in Banking Technology (IDRBT).
The model evolved by the IBA in conjunction with these banks is looking at utilising the structured financial messaging system (SFMS) to facilitate online communication over a secure network. It would involve usage of the INFINET network, a satellite-based area network using VSAT (Very Small Aperture Terminal) technology.
A senior banker explained that when original documents are sent for verification, there is a strong likelihood that these papers could get defrauded on their way. Through SFMS, we can devise a mechanism wherein only the crucial data content is captured at the time of scanning and then, their images can be sent to the other bank involved in the transaction. Once this branch receives the scanned images, it can confirm the receipt and thus,the former bank can disburse the payment.
Arvind Sonmale, MD and CEO, Global Trade Finance, said, “This system will prove to be more helpful in the domestic market than the international one as the local market requires less documentation whereas under international transactions, regulatory authorities insist upon original documents.”