Expanding domestic trade is opening up new avenues for increased trade financing. Banks are trying to exploit these opportunities, but admit they need to do more.

Recent State Bank statistics show that banks’ net lending to wholesale trade doubled to Rs6 billion in 2013 from Rs3 billion in 2012. On the other hand, their net financing to the retail sector inched up to about Rs9 billion from a little less than Rs8 billion over this period.

This is a reflection of growth in domestic trade and also indicates that banks are meeting domestic trade financing requirements better than before.

“Still, there is a huge gap,” admits the head of commercial banking of a large local bank. Meeting credit requirements of the retail sector has been on banks’ action plan since the retailing boom began in mid-1990s. But fulfilling the financial needs of wholesalers has remained part of conventional banking practices, and banks have focused on this area only lately.

“Part of the financial needs of wholesalers is covered by import financing as most importers are also in the wholesale business, particularly in the food sector,” says another senior banker, justifying why banks don’t focus exclusively on wholesalers.

“Besides, wholesale outfits which cater to small exporters are losing out businesses to larger export houses, leaving only those in operation that cater to raw material needs of exporters, and they too are covered by import financing.”

The share of wholesale and retail businesses in GDP was Rs360 billion in FY13. But banks’ combined financing to both these sectors stands at around Rs15 billion. “This is too small and needs to be enhanced.”

But bankers argue that scant documentation of domestic trade blocks faster growth in financing from banks. “Our financing to retail and wholesale sectors is bound to remain limited if the retailer or the wholesaler is operating in the informal economy and if he can’t furnish to his national tax number and even receipts of sales or purchases,” says the head of commercial banking of a big foreign bank.

Central bankers, however, say banks often ignore domestic trade financing demand for some other reasons as well; the first one being their focus on industrial and consumer lending.

“Lending to industries is most feasible because lending volumes here are much larger and the cost of documentation and monitoring of loans can be managed very well,” says a senior central banker. “In consumer lending, the number of loans runs into hundreds of thousands, but banks can make up for the higher cost of lending by charging very high annualised rates of return.”

Trade financing, on the other hand, is trickier. “Reaching out and catering to the needs of domestic trade setups is very expensive, but charging interest rates equal to those on consumer loans makes traders uneasy,” says a local banker.

“Besides, in every wholesale and semi-wholesale market, many traders also meet financial needs through committees or short-term lending by fellow traders.”

Bankers, however, seem to have started realising that while traders can carry on their domestic trade activities without formal financing, banks cannot afford to ignore their financial requirements for long. Unlike industrial and consumer credit demand, trade finance demand potential is big.

During periods of slower economic growth, much business activity revolves around internal trading. And when overall industrial output is low, a few industries that keep producing more, find it easier to experiment with innovative ideas for promoting sales.

Similarly, even when export growth slows down, some exporters try to boost local sales either to compensate the loss in foreign sales or just because they now can spare time and energy on this area. In this situation, too, internal trading cycle gets into gear.

“Keeping these and similar things in mind, banks are now trying to penetrate further into domestic trade financing, and some of them are even coming up with tailor-made products,” a seasoned banker told Dawn, while naming several such products.

These products cover a vast range of funding and financial services needs of local traders, including cash flow management, running finance, internal letters of credit and guarantees, and receipt repayments.

Bankers say they plan to tap into two particular areas of domestic trade; one related to businesses dealing with farm produce wholesalers, and the other for trade-oriented small and medium enterprises (SMEs) to further boost their domestic financing.

The recent recovery in large-scale manufacturing and prospects of faster growth in exports in the near future are sure to revitalise not only the SME sector as a whole, but also trade-related SMEs.

On the other hand, “shrinking gaps between agricultural-dominated rural businesses and services-related urban businesses is sure to provide us more opportunities of local trade financing,” says a senior executive of a leading Islamic bank. “Both conventional and Islamic banks are readying themselves to cater more efficiently to such businesses.”