International Trade Financing by Banks: Addressing the Risk

This paper looks at the process of trade financing decisions taken by banks and the inherent risks associated with such decisions for both import and export financing. Non-receipt of payment from the foreign counterparty for export bills financed by banks in India requires the fixation or ‘crystallization’ of the rupee liability of the bill after specified days in accordance with Reserve Bank of India regulations. The amount is then recovered by banks in rupees from the account of the exporter client. Using data on crystallized and/or overdue bills from the two large public sector banks in India, the paper identifies key independent variables which could impact the event crystallization or otherwise of the export bill. Using logistic regression analysis, we examine the significance of these variables and check the viability of the trade finance scoring model, which can help bankers to objectively ascertain risks associated with each trade transaction financed.