iStockCross-border trade is a domain fraught with uncertainties at all levels. One of the major roadblocks to successful overseas trade operations is the inability to meet the requirements for foreign exchange (forex) systems and norms. This issue has the potential to mar trade deals. In trade parlance, leveraging forex requirements effectively is considered to be a sure-shot strategy for positive business outcomes.
Fluctuations in the values of foreign currencies is a constant and a big challenge in cross-border trade. While this issue affects exporting firms of all shapes and sizes, the country's MSME firms are more vulnerable to this hazard. Though the MSME sector accounts for nearly half of India’s outwards shipments, this segment is traditionally characterised by low awareness about the procedural know-how in dealing with forex requirements and associated risks.
The up-down equation
A fall in the Indian rupee — which also means a stronger dollar — helps exporters earn comparatively more for their exports, making Indian exports more competitive. But a decline in the currency also means that imported inputs become expensive for domestic industries, affecting MSMEs the most. Lots of MSMEs do exports as well as raw material imports. Therefore, any steep depreciation in the rupees cuts them both ways. Industry estimates have revealed that imported inputs form about half of India’s exports. The Federation of Indian Export Organisations recently flagged that while rupee depreciation would help spur exports, it would also raise input costs for the downstream manufacturing sector. Given this situation, exporters would prefer that there is no drastic volatility and fluctuation in the currency of the trade. Such stability will also help small businesses in better financial planning.
So, what are the common solutions an exporter can embrace to mitigate forex-related risks?
Forex hedging is a method often used by exporters to prevent exchange risks in cross-border transactions. Under this method, the exchange rate for the transaction is fixed for a future date, instead of using the exchange rate prevailing on the day of trade.
While this looks overly simplistic, the fact remains not many MSME firms know or avail of this solution. The reason, as revealed by industry trends, is that hedging is a complex procedure and requires specialised knowledge. So, it is not a popular option among novice exporters. At times, exporters need to seek the help of industry experts or consultants who charge a fee for their services. This increases the transaction cost for exporters.
There are many geographies where currency volatility and fluctuations remain a big issue. In such markets, locking the currency value of the commercial transaction via a hedging mechanism can greatly aid exporters in mitigating potential currency risks.
It's worth mentioning that hedging is a double-edged sword for exporters: While it reduces trade risks, it also significantly cuts any chances of potential windfall profits that exporters can earn in case of a favourable movement in the currency. Therefore, currency hedging remains a technique used by traders desiring to play it safe while selling goods abroad. Experts suggest exporters do a thorough cost-benefit analysis before taking a hedging decision.
Blind spot for exporters
The reluctance among MSME exporters to update their knowledge and employ the latest forex strategies is a big growth bottleneck for them, say industry observers.
Arjun Abraham Zacharia, Founder of trade facilitation platform EximPe, says MSMEs that undertake cross-border trade run their businesses in a manual, on-the-phone, paper-heavy and in-branch manner. As a result, cross-border payments remain expensive, delayed and often non-compliant with the rules of the land. For example, if an MSME wishes to conduct a transaction in the US dollar (USD), there is no credible way to obtain the rate. Of course, one can “Google it”, but that does not return accurate trade rates, he says. Hence, a trustworthy, digital 24/7 source that delivers tradable rates from several Indian banks is very much required, says Zacharia. “In most cases, MSME exporters still opt to walk into a bank branch or call the bank for a rate. This is a manual procedure that can take up to two days at times because of verification procedures and bureaucratic issues. The rates can change during that time, incurring possible losses for the exporter. Unfortunately, we live in turbulent times where currency fluctuates daily and hedging or a forward cover rate is now rarely utilised by MSMEs due to a lack of information and access. Banks and trade organisations must work together to raise awareness among MSMEs,” he says.
Small businesses, particularly those just starting up, are generally unaware of the compliances in cross-border payments. These norms include executing the BOE (bill of exchange) regularisation for imports and exports. If this is not done, for every payment, an exporter can get blacklisted, and end up losing trade deals. Hence, it is critical for exporting firms to carry out due diligence relating to currency exposure management.
Default in forex payments is also a common issue faced by the exporting community. Experts, however, point out there are certain dos and don'ts that might help exporters address such issues. “Variants of cash-in-advance payment terms — including usage of escrow account services — are also considered in cases where exporters have higher bargaining power,'' says Sudipta Bhattacharjee, Partner, Indirect tax and Customs, Khaitan & Co.
Letters of credit (L/C) is a generally accepted secure methodology that strikes a better balance between the competing interests of buyers and exporters, he says.
A L/C represents a commitment by the buyer’s bank to pay the exporter as long as the conditions stated in the document have been met. Letters of credit may be particularly attractive for MSME exporters when the buyer’s creditworthiness is doubtful. This is because a well-known bank backs the buyer through a L/C.
There are several tools and solutions to curb forex-related payment issues. Exporters should make the best use of such solutions.
According to Bhattacharjee, exporters can make use of a range of insurance covers to protect themselves from the risk of non-realisation of trade proceeds. The Export Credit Guarantee Corporation of India Limited is one organisation that offers various insurance products and working capital financing options to Indian exporters.
“A host of financing options may soon open up for MSME exporters in India with the International Trade Finance Service (ITFS) platforms for facilitating trade finance through lenders across the globe becoming fully functional. These platforms will enable the best possible price discovery through a live auction process, thereby offering a much larger palate of financing choices for Indian exporters,” adds Bhattacharjee.
While better exposure management remains key in tackling forex fluctuations, adoption of technology can make a big difference too, claim industry observers.
Pratik Sharma, the COO at Automaxis, a platform connecting freight, documents and payment in cross-border trade, vouches for tech adoption to ensure deals go through smoothly. Exporters sit on a major currency fluctuation risk as they ship goods and get the payment only after a certain period. They may end up at a loss in case the currency rate changes. “Exporters can know the current forex rates through 3rd party API services that can be integrated into the legacy systems or apps. They can also get predictions about future prices. Exporters can also select the duration and decide whether to go for forwards contracts or options in order to hedge the currency arbitrations," adds Sharma.
To resolve documentation issues in cross-border trade, his firm has come up with a blockchain platform for secure and speedy transfer of ownership of bills of lading in real time. In usual course, this paper passes through at least 3 courier services and takes 7-10 days to reach the destination, claims the firm, adding that technology can be a great saviour for exporters in tackling various forex requirements.
Fluctuations in the values of foreign currencies is a constant and a big challenge in cross-border trade. While this issue affects exporting firms of all shapes and sizes, the country's MSME firms are more vulnerable to this hazard. Though the MSME sector accounts for nearly half of India’s outwards shipments, this segment is traditionally characterised by low awareness about the procedural know-how in dealing with forex requirements and associated risks.
The up-down equation
A fall in the Indian rupee — which also means a stronger dollar — helps exporters earn comparatively more for their exports, making Indian exports more competitive. But a decline in the currency also means that imported inputs become expensive for domestic industries, affecting MSMEs the most. Lots of MSMEs do exports as well as raw material imports. Therefore, any steep depreciation in the rupees cuts them both ways. Industry estimates have revealed that imported inputs form about half of India’s exports. The Federation of Indian Export Organisations recently flagged that while rupee depreciation would help spur exports, it would also raise input costs for the downstream manufacturing sector. Given this situation, exporters would prefer that there is no drastic volatility and fluctuation in the currency of the trade. Such stability will also help small businesses in better financial planning.
So, what are the common solutions an exporter can embrace to mitigate forex-related risks?
Forex hedging is a method often used by exporters to prevent exchange risks in cross-border transactions. Under this method, the exchange rate for the transaction is fixed for a future date, instead of using the exchange rate prevailing on the day of trade.
While this looks overly simplistic, the fact remains not many MSME firms know or avail of this solution. The reason, as revealed by industry trends, is that hedging is a complex procedure and requires specialised knowledge. So, it is not a popular option among novice exporters. At times, exporters need to seek the help of industry experts or consultants who charge a fee for their services. This increases the transaction cost for exporters.
There are many geographies where currency volatility and fluctuations remain a big issue. In such markets, locking the currency value of the commercial transaction via a hedging mechanism can greatly aid exporters in mitigating potential currency risks.
It's worth mentioning that hedging is a double-edged sword for exporters: While it reduces trade risks, it also significantly cuts any chances of potential windfall profits that exporters can earn in case of a favourable movement in the currency. Therefore, currency hedging remains a technique used by traders desiring to play it safe while selling goods abroad. Experts suggest exporters do a thorough cost-benefit analysis before taking a hedging decision.
Blind spot for exporters
The reluctance among MSME exporters to update their knowledge and employ the latest forex strategies is a big growth bottleneck for them, say industry observers.
Arjun Abraham Zacharia, Founder of trade facilitation platform EximPe, says MSMEs that undertake cross-border trade run their businesses in a manual, on-the-phone, paper-heavy and in-branch manner. As a result, cross-border payments remain expensive, delayed and often non-compliant with the rules of the land. For example, if an MSME wishes to conduct a transaction in the US dollar (USD), there is no credible way to obtain the rate. Of course, one can “Google it”, but that does not return accurate trade rates, he says. Hence, a trustworthy, digital 24/7 source that delivers tradable rates from several Indian banks is very much required, says Zacharia. “In most cases, MSME exporters still opt to walk into a bank branch or call the bank for a rate. This is a manual procedure that can take up to two days at times because of verification procedures and bureaucratic issues. The rates can change during that time, incurring possible losses for the exporter. Unfortunately, we live in turbulent times where currency fluctuates daily and hedging or a forward cover rate is now rarely utilised by MSMEs due to a lack of information and access. Banks and trade organisations must work together to raise awareness among MSMEs,” he says.
Small businesses, particularly those just starting up, are generally unaware of the compliances in cross-border payments. These norms include executing the BOE (bill of exchange) regularisation for imports and exports. If this is not done, for every payment, an exporter can get blacklisted, and end up losing trade deals. Hence, it is critical for exporting firms to carry out due diligence relating to currency exposure management.
Default in forex payments is also a common issue faced by the exporting community. Experts, however, point out there are certain dos and don'ts that might help exporters address such issues. “Variants of cash-in-advance payment terms — including usage of escrow account services — are also considered in cases where exporters have higher bargaining power,'' says Sudipta Bhattacharjee, Partner, Indirect tax and Customs, Khaitan & Co.
Letters of credit (L/C) is a generally accepted secure methodology that strikes a better balance between the competing interests of buyers and exporters, he says.
A L/C represents a commitment by the buyer’s bank to pay the exporter as long as the conditions stated in the document have been met. Letters of credit may be particularly attractive for MSME exporters when the buyer’s creditworthiness is doubtful. This is because a well-known bank backs the buyer through a L/C.
There are several tools and solutions to curb forex-related payment issues. Exporters should make the best use of such solutions.
According to Bhattacharjee, exporters can make use of a range of insurance covers to protect themselves from the risk of non-realisation of trade proceeds. The Export Credit Guarantee Corporation of India Limited is one organisation that offers various insurance products and working capital financing options to Indian exporters.
“A host of financing options may soon open up for MSME exporters in India with the International Trade Finance Service (ITFS) platforms for facilitating trade finance through lenders across the globe becoming fully functional. These platforms will enable the best possible price discovery through a live auction process, thereby offering a much larger palate of financing choices for Indian exporters,” adds Bhattacharjee.
While better exposure management remains key in tackling forex fluctuations, adoption of technology can make a big difference too, claim industry observers.
Pratik Sharma, the COO at Automaxis, a platform connecting freight, documents and payment in cross-border trade, vouches for tech adoption to ensure deals go through smoothly. Exporters sit on a major currency fluctuation risk as they ship goods and get the payment only after a certain period. They may end up at a loss in case the currency rate changes. “Exporters can know the current forex rates through 3rd party API services that can be integrated into the legacy systems or apps. They can also get predictions about future prices. Exporters can also select the duration and decide whether to go for forwards contracts or options in order to hedge the currency arbitrations," adds Sharma.
To resolve documentation issues in cross-border trade, his firm has come up with a blockchain platform for secure and speedy transfer of ownership of bills of lading in real time. In usual course, this paper passes through at least 3 courier services and takes 7-10 days to reach the destination, claims the firm, adding that technology can be a great saviour for exporters in tackling various forex requirements.
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