India's finance ministry has issued a directive asking public sector banks (PSBs) to adopt a common messaging system for communicating trade finance messages.

The ministry reckons that using the common system will help prevent fraud during the process of discounting letters of credit (L/Cs) and the encashment of bank guarantees.

Acceptable channels

According to the ministry's directive, as of 1 August 2012, no PSB can issue any L/C or bank guarantee except through the structured financial messaging system (SFMS).

Moreover, L/Cs and bank guarantees from any other bank that are not channelled through the SFMS will not be accepted.

Secure system

The SFMS was launched in 2001 as a secure and common messaging system for communications within a bank and between banks.

The ministry reckons that making the use of SFMS mandatory will help banks to only use a secure platform for transferring trade finance messages and for sending and receiving L/Cs and bank guarantees.

This will reduce L/C and bank guarantee fraud according to the ministry.

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