Letter of credit (L/C) business is set to grow in India, and banks should prepare for a surge of trade finance business as the country's economy grows.

But as well as more L/C business, banks should expect to offer a broader range of trade finance services, according to speakers at a banking seminar in Mumbai.

Trade growth

Trade finance opportunities in India could be worth in excess of US$2 billion in the next five years, compared with today's figure of US$1.2 billion, said chief general manager for small and medium enterprises at the State Bank of India, J Chandrasekaran.

He suggested banks could increase their profitability by offering not just traditional products such as L/Cs and bank guarantees, but also additional services such as forex and derivatives.

Diversification

Forex income could account as much as 60 per cent of total L/C income, he reckoned and suggested that trade finance bundled with cash management and other services would become more popular than stand-alone products.

Another call for diversification came from the Asia Pacific head of trade and logistic management for J P Morgan, Asif Raza. He said that banks should adopt risk mitigation tools for trade finance, such as loan syndication, and offer credit default swaps.

L/C prospects

Asia contributes 27 per cent of global merchandise trade and 23 per cent of global service trade, a senior vice-president at Bank of America, Subin Subaih, told participants at the seminar.

But he said L/Cs would not grow the fastest as volumes of trade increase. "While L/Cs are still growing, it is at a slower pace than open account," he said, when speaking about areas of growth in trade finance.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.