Indian banks need to expand their global banking relationship, says report

A first-of-its-kind working paper from Mint Road says Indian banks need to expand their global banking relationship. The study’s focus is on bank-intermediated buyers’ credit, which accounts for over 93 per cent of our cross-border trade credit; it calls for a shift towards the use of global instruments instead of the indigenous Letters of Undertaking (LoU) and Letters of Credit (LoC) even though it may push up the costs involved.
 

While domestic banks account for a significant portion of such credit, its distribution is significantly skewed. Those with a large overseas presence have a higher share in trade credit approvals. This is not surprising as these branches played a key role for domestic banks to arrange LoUs and LoCs before they were banned by the Reserve Bank in March 2018.
 
After the global financial crisis, trade credit intermediated by foreign banks grew at a faster pace  but subsequent regulatory tightening led to a fall. Trade credit raised through domestic banks was somewhat resilient in FY16 and FY17. Consequently, the share of foreign banks in such credits fell to one-fifth during FY 14 to FY17 from one-third during FY 18to FY13.