The Finance Ministry has asked public sector banks to use a common messaging system for communicating trade finance messages. This is to prevent frauds in discounting letters of credit (LCs) and encashment of bank guarantees (BGs).
According to the Ministry’s directive, beginning August 1, no public sector bank (PSB) can issue any LC or BG except through the structured financial messaging system (SFMS). Further, no LC or BG from any other bank, including PSB, can be accepted except through SFMS.
SFMS, which was launched in 2001, is a secure and common messaging system for secure communication within a bank and between banks.
An LC is a letter from a bank guaranteeing payment for goods a buyer purchases from a seller. By discounting of LC a seller gets paid immediately even if the buyer has been given a longer term for payment.
A BG is a guarantee from a bank ensuring that the liabilities of a debtor will be met. In other words, if the debtor fails to settle a debt, the bank will cover it.
“It is felt that making use of SFMS mandatory will help banks to establish a secure medium of transferring trade finance messages for sending and receiving LCs and BG instruments. This will establish a safe and secure environment in the Indian banking industry for conducting trade finance business,” said the ministry in a communication to banks.
The ministry pointed out that though the SFMS platform is capable of handling non-payment applications like LCs and BGs in a secure and cost effective way, only a few banks are currently using it.
“Unless majority of banks join (SFMS), there would not be enough counterparties which generate volumes,” said the ministry.
In its methodology for using SFMS for issuing BGs, the ministry said banks will continue to receive applications for BGs as usual. However, along with the application, banks will have to obtain details of the bank of the beneficiary/advising bank for the BG.
“Once it is decided that a BG has to be issued, the same shall be issued on the SFMS platform…This message will be sent to the beneficiary’s bank/ advising bank through SFMS,” said the ministry.
Emphasising that the SFMS platform has demonstrated its resilience, security and scalability, the ministry observed that it has been successfully used by banks and some State governments for national electronic funds transfer.
The NEFT volumes using SFMS have touched nearly 3 million a day and have grown over 100 per cent a year-on-year basis, said the communication.