The International Finance Corporation (IFC) has suggested that banks in North East India should consider adopting a trade enhancement facility similar to one already adopted over the border in Bangladesh.

According the IFC's South-Asia Enterprise Development Facility (SEDF), such a facility would speed up letter of credit (L/C) payments for banks in India and reduce the very high volume of informal trades between Bangladesh and India's north-eastern provinces.

Transaction costs

A recent SEDF study found that informal trade between Bangladesh and North East India has been increasing, apparently as result of the additional costs attached to formal cross-border transactions that make these trades between 10-20 per cent more expensive than informal transactions.

According to an IFC-quoted estimate, informal trade between North East India and Bangladesh accounts for around 35 per cent of total trade between the two areas.

Payment delays

The IFC agency has suggested to the governments of both countries that they should consider backing L/C arrangements under which exporters are guaranteed timely payment for goods. Traders and banks in both countries have apparently been blaming each other for delays in payments of as much as six months.

The SEDF study looked at 100 Indian bankers and exporters and found that the banks were restricted by instructions to limit their exposure to Bangladesh and believed the Bangladeshi banking system was inadequately regulated. Bangladeshi bankers meanwhile blamed the Indian banks for slow payments.

Bangladeshi facility

The existing US$52 million trade enhancement facility already in place in Bangladesh is aimed at small- and medium-sized importers and exporters. Under the terms of that facility, the IFC and the Dutch Development Agency (FMO) jointly guarantee the scheme's operator Standard Chartered (SCB) up to US$26 million of the total facility amount and up to 50% of each transaction.

The two-year revolving facility is aimed at ensuring better accessibility to L/C confirmation by guaranteeing documentary credits originated by selected commercial banks. The facility is aimed at improving country limits and pricing issues.

SEDF remit

The SouthAsia Enterprise Development Facility (SEDF) was launched in October 2002 to support sustainable growth and development of small and medium-sized enterprises (SMEs) in Bangladesh, Northeast India, Bhutan and Nepal.

The bulk of SEDF's resources are geared toward assisting Bangladesh's SMEs, which account for over 80 percent of the industrial labour force and 50 percent of the nation's output.

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