forex: how to expedite the handling of forex issues faced by exporters

Cross-border trade is an area full of uncertainties at all levels. One of the main obstacles to successful business operations abroad is the inability to meet the requirements of foreign exchange (forex) systems and standards. This problem has the potential to ruin trade deals. In trading parlance, effectively leveraging foreign exchange requirements is considered a sure-fire strategy for positive trading results.

Fluctuations in foreign currency values ​​are a constant and a great challenge in cross-border trade. Although this problem affects exporting businesses of all shapes and sizes, MSMEs in the country are more vulnerable to this risk. Although the MSME sector accounts for nearly half of outbound shipments from India, this segment has traditionally been characterized by low knowledge of procedural know-how in dealing with foreign exchange requirements and associated risks.

The up-down equation

A lower Indian rupee – which also means a stronger dollar – helps exporters earn comparatively more for their exports, making Indian exports more competitive. But a falling currency also means that imported inputs become expensive for domestic industries, which affects MSMEs the most. Many MSMEs export as well as import raw materials. Therefore, any sharp depreciation of the rupees cuts them in both directions. Industry estimates have revealed that imported inputs account for about half of India’s exports. The Federation of Indian Export Organizations recently reported that while the rupee’s depreciation will help boost exports, it will also increase input costs for the downstream manufacturing sector. Given this situation, exporters would prefer that there was no drastic volatility and fluctuation in the currency of trade. Such stability will also help small businesses better plan their finances.

So what are some common solutions an exporter can adopt to mitigate forex risk?

Currency hedging is a method often used by exporters to prevent currency 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 in effect on the day of the transaction.

Although it seems too simplistic, the fact is that few MSMEs know or use this solution. The reason, as revealed by industry trends, is that hedging is a complex procedure and requires specialist knowledge. It is therefore not a popular option among novice exporters. Sometimes exporters have to seek help from industry experts or consultants who charge a fee for their services. This increases the transaction cost for exporters.

There are many geographies where volatility and currency fluctuations remain a big problem. In these markets, locking in the monetary value of the trade transaction through a hedging mechanism can greatly help exporters mitigate potential currency risks.

It is worth mentioning that hedging is a double-edged sword for exporters: although it reduces business risks, it also significantly reduces the chances of potential windfall profits that exporters can earn in the event of a favorable currency movement. Therefore, currency hedging remains a technique used by traders wishing to play it safe while selling goods overseas. Experts suggest exporters do a thorough cost-benefit analysis before making a hedging decision.

Blind spot for exporters

The reluctance of exporting MSMEs to update their knowledge and use the latest forex strategies is a big bottleneck for their growth, according to industry watchers.

Arjun Abraham Zacharia, founder of trade facilitation platform EximPe, explains that MSMEs undertaking cross-border trade run their businesses manually, over the phone, with lots of paper and in-branch. As a result, cross-border payments remain expensive, delayed, and often inconsistent with the country’s rules. For example, if an MSME wants to transact in US dollars (USD), there is no credible way to get the rate. Sure, you can “Google” it, but that doesn’t yield accurate trading rates, he says. Therefore, a reliable 24/7 digital source that provides tradable rates from multiple Indian banks is a must, Zacharia says. “In most cases, MSME exporters still choose to go to a bank branch or call the bank to get a quote. This is a manual process that can sometimes take up to two days due to verification procedures and bureaucratic issues. Rates may change during this period, resulting in possible losses for the exporter. Unfortunately, we live in turbulent times where currency fluctuates daily and hedging or a forward hedge rate is now rarely used by MSMEs due to a lack of information and access. Banks and business organizations need to work together to sensitize MSMEs,” he says.

Small businesses, especially those just getting started, are typically unaware of cross-border payment compliances. These standards include the execution of BOE regularization (bill of exchange) for imports and exports. If this is not done, for every payment an exporter can be blacklisted and end up losing trade deals. Therefore, it is essential that exporting companies exercise due diligence in managing currency risk.

Foreign currency default is also a common problem faced by the exporting community. Experts, however, point out that there are some do’s and don’ts that could help exporters solve these problems. “Variations of prepayment terms – including the use of escrow account services – are also being considered where exporters have higher bargaining power,” says Sudipta Bhattacharjee, Partner, Indirect Taxes and Customs, Khaitan & Co.

Letters of credit (L/C) are a generally accepted secure methodology that strikes a better balance between the competing interests of buyers and exporters, he says.

AL/C represents an undertaking by the buyer’s bank to pay the exporter as long as the conditions set out in the document are met. Letters of credit can be particularly attractive for exporting MSMEs when the creditworthiness of the buyer is questionable. Indeed, a well-known bank supports the buyer through a letter of credit.

There are several tools and solutions to limit payment problems related to forex. Exporters should make the most of these solutions.

According to Bhattacharjee, exporters can avail of a range of insurance covers to protect against the risk of non-realization of trade revenue. The Export Credit Guarantee Corporation of India Limited is an organization that offers various insurance products and working capital financing options to Indian exporters.

“A host of financing options could soon open up to MSME exporters in India with the International Trade Finance Service (ITFS) platforms to facilitate trade finance through lenders around the world becoming fully functional These platforms will enable the best possible price discovery through a live auction process, thus providing a much wider range of financing choices for Indian exporters,” adds Bhattacharjee.

While better exposure management remains key to combating forex swings, embracing technology can also make a big difference, say industry watchers.

Pratik Sharma, COO at Automaxis, a platform linking freight, documents and payment in cross-border trade, vouches for the adoption of technology to ensure transactions run smoothly. Exporters are exposed to a major currency fluctuation risk when they ship goods and only receive payment after a certain period. They may end up at a loss if the exchange rate changes. “Exporters can get current exchange rates through third-party API services that can be integrated into legacy systems or applications. They can also get future price forecasts. Exporters can also select the duration and decide whether to opt for futures or options to hedge against currency arbitrage,” adds Sharma.

To solve documentation problems in cross-border trade, his company has developed a blockchain platform for secure and fast transfer of ownership of bills of lading in real time. Typically, this document goes through at least 3 couriers and takes 7-10 days to reach the destination, the company says, adding that technology can be a big lifesaver for exporters by tackling various requirements of exchange.

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