India must fix trade finance to boost export growth

Source: The post India must fix trade finance to boost export growth has been created, based on the article “Fixing India’s trade finance bottleneck” published in “Businessline” on 12 May 2025. India must fix trade finance to boost export growth.

UPSC Syllabus Topic: GS Paper3-Economy-growth, development and employment.

Context: India aims to reach $2 trillion in exports by 2030, backed by merchandise exports of $437 billion in FY 2023–24 and new trade agreements. But a fragile trade finance system, especially for MSMEs, could stall this ambition.

Fragility of India’s Trade Finance System

1. Widening Credit Gap: Export credit supports only 28.5% of the $284 billion needed for shipments. From 2021 to 2023, priority sector lending for export credit fell 41%, from ₹19,861 crore to ₹11,721 crore — showing structural neglect.
2. Declining Credit Availability: Between March 2023 and March 2024, outstanding export credit fell from ₹2.27 lakh crore to ₹2.17 lakh crore. Exporters face rising input costs, higher freight rates, and delayed global payments.
3. MSMEs Locked Out of Finance: MSMEs contribute nearly 40% to goods exports but face limited access to affordable credit. They lack safeguards like dedicated lending norms, and banks demand high collateral.
4. Policy Support Missing: The Interest Equalisation Scheme expired in 2023, removing a key subsidy. Many exporters are unaware of tools like post-shipment finance or receivables discounting, highlighting poor financial literacy.

Regulatory Roadblocks and Rigid Lending Norms

1. Inflexible Risk Norms: The RBI does not recognise private trade credit insurance for capital relief. Only ECGC-backed cover qualifies, making risk-sharing tools unattractive for banks.
2. Factoring System Underdeveloped: India’s exporters need factoring for liquidity and buyer risk transfer, especially in open account trade. But factoring remains underused, often limited to large firms and backed by collateral.
3. Stark Global Comparison: India’s factoring volume was only €17.38 billion in 2023 — less than 0.5% of global turnover. Europe accounted for 67%, and China alone reported €634.6 billion, showing India’s lag.
4. Over dependence on Collateral: Fintech lenders also demand traditional security, excluding asset-light MSMEs who trade on trust and require flexible finance options.

Limited Progress in Digitising Trade Finance

1. Slow TReDS Adoption: TReDS aims to support invoice-based MSME financing, but low awareness, poor documentation, and buyer reluctance have slowed its uptake.
2. Fragmented Digital Ecosystem: Despite tools like e-invoicing, e-way bills, and customs digitisation, there is no integrated platform linking banking, logistics, and trade data.
3. Legal Disconnect from Global Norms: India has delayed adopting UNCITRAL’s MLETR, which gives legal status to electronic trade documents. This is due to outdated laws and fragmented regulatory control.

Strategic Reforms for a Robust Trade Finance Ecosystem

1. Regulatory Modernisation: Allow private trade credit insurance for capital relief. Relax capital norms to enable more flexible lending.
2. Platform Integration and Legal Reform: Integrate digital trade platforms. Align domestic law with MLETR to support paperless commerce.
3. Boost TReDS Participation: Mandate wider usage of TReDS. Encourage both buyers and MSMEs to participate.
4. Support MSMEs and Build Literacy: Create tools to educate exporters. Provide risk mitigation frameworks and improve access to finance.

Question for practice:

Examine how the weaknesses in India’s trade finance system could hinder the country’s goal of achieving $2 trillion in exports by 2030.