Fixing India’s trade finance bottleneck #IndiaFinance

Despite advances in e-invoicing, e-way bills, and customs digitisation, there is still no integrated platform where banking, shipping, customs, and insurance data flow seamlessly
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India’s export engine is revving — but it’s running low on fuel. As the country sets its sights on reaching $2 trillion in exports by 2030, bolstered by merchandise exports of $437 billion in FY 2023-24 and a series of new trade agreements, the ambition is clear. Yet, a critical vulnerability threatens to stall this momentum: a fragile and underdeveloped trade finance ecosystem.

According to the Directorate General of Foreign Trade, export credit covered only 28.5 per cent of the $284 billion required to support current shipment volumes. RBI data further reveals a 41 per cent drop in export credit disbursed under priority sector lending between 2021 and 2023, from ₹19,861 crore to ₹11,721 crore. This is not a statistical anomaly — it reflects structural neglect at a time when global trade is more volatile and capital-intensive. The financing squeeze is most acute for MSMEs, which contribute nearly 40 per cent of India’s goods exports but remain locked out of affordable, timely credit.

Financial strain

The cracks in India’s trade finance system are no longer subtle. Between March 2023 and March 2024, outstanding export credit shrank from ₹2,27,452 crore to ₹2,17,406 crore — a decline that cuts to the core of India’s export competitiveness. Exporters are being squeezed by a confluence of challenges: rising input costs, surging freight rates as shipping lanes shift around conflict zones, and delayed remittances from global buyers navigating economic uncertainty. Just when the need for working capital is most acute, banks are retreating — playing it safe.

While exports account for over 20 per cent of India’s GDP, export credit remains a marginal fraction of overall bank lending. Unlike MSMEs, which benefit from mandated Priority Sector Lending (PSL) targets, exporters have no dedicated credit safeguards. If India truly aspires to build an export-driven economy, it must rethink this imbalance. The expiry of the Interest Equalisation Scheme in 2023 further deepened the crisis, leaving smaller exporters without vital subsidised credit. Alarmingly, many exporters remain unaware of basic financing options like post-shipment finance or receivables discounting, underscoring a broader failure in financial literacy among the businesses that fuel India’s trade ambitions.

Importers, too, face mounting pressure. As shipping costs and currency risks escalate, their capital needs are rising — but banks remain fixated on collateral, not trade flows. This rigidity persists even in critical sectors like pharmaceuticals, where firms importing APIs to fuel exports face no targeted financial support. In today’s global trade environment, liquidity is leverage, and India risks falling behind without it.

Missed promise of factoring

India’s banking system, when it comes to trade finance, is constrained by outdated regulations and rigid risk norms. A quintessential barrier is the Reserve Bank of India’s refusal to recognise private trade credit insurance for capital relief. Unlike their counterparts in Europe or Singapore, Indian banks cannot reduce capital requirements by insuring trade exposures through global insurers. Only ECGC coverage qualifies — this no longer meets the needs of a modern export economy.

This regulatory blind spot penalises banks for offering flexible, risk-sharing tools like factoring and nudges them toward traditional, collateral-heavy lending. At a time when global trade has shifted towards open account transactions, where payment follows delivery and trust replaces guarantees, India’s exporters need tools like factoring that offer immediate liquidity and transfer buyer risk. Yet factoring remains underused and largely restricted to large corporates, often with recourse and backed by collateral, diluting its intended value.

The consequences are stark. According to 2023 Global Factoring Statistics, Europe accounts for 67 per cent of global factoring turnover, China €634.6 billion, while India lags far behind at just €17.38 billion, under 0.5 per cent of global share. This reflects a systemic failure to modernise trade finance and unlock liquidity for the exporters.

India has taken commendable steps to digitise trade finance through platforms like TReDS and the upcoming Bharat Trade Net. However, structural barriers continue to limit their impact.

TReDS adoption remains low, hindered by limited SME awareness, poor documentation standards, and buyer reluctance to expose payment practices. Even fintech lenders often default to collateral-heavy models, side-lining asset-light exporters who need the most support.

India’s broader digital trade ecosystem remains fragmented. Despite advances in e-invoicing, e-way bills, and customs digitisation, there is still no integrated platform where banking, shipping, customs, and insurance data flow seamlessly.

Internationally, India’s digital trade tools suffer from weak legal enforceability. India’s delay in adopting the UNCITRAL Model Law on Electronic Transferable Records (MLETR) stems from a cautious regulatory mindset, outdated laws that still assume paper-based commerce, and fragmented institutional ownership across ministries. Until this legal and systemic fragmentation is addressed, fintech will remain an underleveraged tool in bridging the trade finance gap.

Way forward

Exporters — especially MSMEs — require timely, affordable credit to scale, modernise, and remain competitive in a world of open account trade. This calls for regulatory clarity and political will: recognising private trade credit insurance for capital relief, integrating fragmented digital platforms, mandating broader participation on TReDS, aligning Indian law with global standards like MLETR, and building MSME financial literacy and risk mitigation tools.

The writer is an ex-banker and Senior Research Fellow at the Indian Institute of Foreign Trade

Published on May 11, 2025