The International Financial Services Agency (IFSCA) was established at GIFT City, Gujarat, under the IFSCA Act, 2019. The main aim is developing and regulating financial products, financial services and financial institutions in International Financial Services Centers (IFSCs).
IFSCA has published a framework for the creation and operation of the International Trade Financial Services (ITFS) to provide financial services at the IFSC. The aim of the ITFS platform is to attract business finance from international sources to Indian exporters and importers. This move simplifies the process for businesses to secure working capital, reducing operating costs.
What is Trade Finance:
Trade finance represents the financial instruments and products that are used by companies to facilitate international trade and commerce. It makes this possible and easier for importers and exporters to transact business through trade.
Trade finance is an umbrella term that refers to the many financial products that banks and companies utilize to make trade transactions feasible. Such financial transactions can reduce risk when managing cross-border with other countries.
How does it work:
Due to the large financial nature of global trade, exporters require an importer to prepay for the goods shipped. He uses this to produce the goods and pay for his own costs as working capital. Naturally, the importer wants to minimize risk. Therefore, exporters are asked to provide proof that they have sent the items.
The importer’s bank helps by giving the exporter (or the exporter’s bank) a letter of credit. So that guarantees payment upon the presentation of specific documents, like a bill of lading. On the basis of the export contract, the exporter’s bank may grant the exporter a loan.
The type of document used in the process depends on the nature of the transaction and how you can show evidence of performance (such as using a bill of lading to demonstrate shipment). Banks only deal with documents and not the actual goods, services, which the documents may be relating to.
What is the situation in India:
The ability of exporters and importers to convert their trade receivables into liquid funds or to find short-term funding for their payments for the import of products or services is one of the challenges they confront while trying to secure suitable financing.
Smaller businesses and MSMEs particularly feel the impact. Because they struggle to find channels to process the money, even after finding a global customer prepared to transfer over pre-payment. The finance ministry has approved the setting up of the ITFS platforms.
The framework aims to enable exporters and importers to avail various types of trade finance facilities at competitive terms for their international trade needs. A dedicated electronic platform, ITFS, focuses on helping them convert their trade receivables into liquid funds and obtain short-term funding. Currently, about 4-5 platforms have received licenses for setting up the ITFS entity.
How will it work:
The International Financial Services Centres Authority (IFSCA) is leading this move towards increased liquidity for exporters and MSMEs at Ahmedabad’s Gujarat International Finance Tech-City (GIFT City), a project that the Prime Minister’s Office is actively watching and promoting.
The ITFS framework will give participants the chance to use trade finance services for eligible products. Those are factoring, insurance, reverse trade financing, bill discounting under letter of credit, export credit (packing credit), export invoice trade financing, and reverse trade financing.
Who can set up an ITFS:
Bank or finance company must be incorporated separately to establish an ITFS in an IFSC. The parent entity, promoters, or promoter groups of the company applying to set up an International Trade Finance Services should have a minimum net worth of $1 million.
rivexa has partnered with ITFS platforms. Exporters can leverage rivexa’s value-added services to solve their working capital challenges. They can avail of pre-shipment and post-shipment finance.
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