The curious case of accessible trade finance for MSMEs in India

Tim Nicolle

It is widely accepted that MSMEs are the growth engine of the Indian economy. Not only do they play a significant role in the industrialisation of the remote areas as well as in generating employment there, but they also establish their own enterprises, enable higher exports, and help foster innovation.

There are nearly 50 million small companies in the country working hard to provide employment and generate a living for a large part of the Indian workforce. Moreover, with a large number of young people entering the workforce over the next ten years – MSMEs must be supported and nurtured to ensure that economic growth keeps pace with the increasing requirement to provide gainful employment. However, when it is written that these enterprises face multiple hurdles in their growth due to lack of access to low-cost trade finance, does it really hold any relevance?

There is a much-quoted figure about the US$1.5 trillion “finance gap” between the demand for finance and provision of finance for MSMEs across Asia. However, the ground reality is entirely different.Both banks and the new breed of non-bank trade finance companies do fill the trade finance gaps that exist. Bankable trades are generally financed, often at low cost and increasingly without collateral. Most of the reported trade finance gap relates to non-bankable trades where finance is hoped for but, perhaps rightly, is not provided.

MSMEs usually face numerous other challenges that possibly becomes a hurdle in accessing finance. It also depends on the sectors they are involved with. These usually involve lack of comprehensive databases, low level of research and development, inadequate leadership abilities and lack of skilled staff.

So what does an MSME have to do to get finance?

Take the time to understand the risks of financing the trade. Although, there are multiple risks, two of them are the major ones: (a) will the exporter meet his obligations in full? (b) will the buyer then pay? Once they have a clear picture in mind, MSMEs should put forward only the right trades for financing where risks are low and so the financial cost can be low. They should keep the more speculative business in their own hands.

Meanwhile, how can trade finance providers assess these two main risks of a trade? Will the exporter do his part of the bargain and ship the right stuff, on time, to the right quality? Identifying such risks will always be difficult for financiers as they are not experts in every industry they are supporting. But they are ready to take a view based upon the historical performance of a business and the extent to which the buyer is engaged in the process.

Financeable trades are those where exporters have a good track record and who are working with buyers who actively check what’s shipped before shipment. Export history and buyer engagement are crucial. The less history finance providers can see, the more the buyer needs to be involved in checking what’s shipped. The more the history that is visible, the more finance providers can trust the parties and have confidence that the parties will get the trade right.

But, what about judging whether the buyer will pay? There are two questions here as well: willingness to pay and capability to pay. On the former - “willingness to pay” - this is where history and reputation play a big part. Well-established buyers with well-established supply chains are generally very low at risk when it comes to reliability. On the latter – “capability to pay” – that’s about the financial condition of the buyer and their stability, something which the banking team of finance providers have deep expertise in assessing.

So, considering these points, we might say that the US$1.5 trillion “trade finance gap” between demand and delivery of finance for MSMEs across Asia could be an illusion. Whether it iscoming from a bank or non-bank, a fintech or an established institution, the point basically remains the same. Bankable trades can be financed, often at a low cost and without requiring collateral. Most of the perceived gap in trade finance relates to trades where the risks are too high for low cost, low risk trade finance. And, here the MSME rightly needs equity support to build up the track record to become eligible for low cost trade finance. Although, it is a policy and economic question without easy answers, India surely can get it right going forward.

So what is the market opportunity in trade finance if there is no sizeable “gap”? This is a good question. Our calculations suggest that there is, overall, a market of around US$2 trillion for a simple, properly-priced trade finance product that works transactionally (ie: shipment-by-shipment) and which bridges the time period between paying the exporter upfront and the buyer paying later. This is not a liquidity gap, as the parties involved in these bankable trades are dealing with the working capital themselves – either the buyer paying early (and borrowing) or the supplier giving time to pay (and borrowing). A well-priced and simple working capital product would find a ready market – taking out the borrowing that currently happens. This is much the better way to understand and analyse the opportunity.

Alongside our colleagues in other firms, we are here to support the growth trajectory of Indian MSMEs – and the future is bright. As the economy builds and experience grows, more and more trades enter the reliable territory where finance is easily available – and more of the market is able to access our low cost trade finance. All of this builds India’s competitive position and the continued development of the vital MSME sector.

The author is Founder and CEO of PrimaDollar-- a Fintech Player in Global Trade Finance. Views expressed are personal.