This paper looks at the process of trade financing decisions taken by banks and the inherent risks associated with such decisions for both import and export financing. Non-receipt of payment from the foreign counterparty for export bills financed by banks in India requires the fixation or ‘crystallization’ of the rupee liability of the bill after specified days in accordance with Reserve Bank of India regulations. The amount is then recovered by banks in rupees from the account of the exporter client. Using data on crystallized and/or overdue bills from the two large public sector banks in India, the paper identifies key independent variables which could impact the event crystallization or otherwise of the export bill. Using logistic regression analysis, we examine the significance of these variables and check the viability of the trade finance scoring model, which can help bankers to objectively ascertain risks associated with each trade transaction financed.

The importance of international trade activities of firms can hardly be overstated in this era of globalized and liberalized economies worldwide. An international trade transaction is either financed by the buyer (importer) or seller (exporter) or one or more financial institutions (Madura, 2003). The buyer or seller may finance the entire trade cycle, beginning with the procurement of raw materials, production of goods/services, shipping of goods/transfer of services and final receipt of goods by the buyer in his country. Such a financing arrangement may be referred to as buyer’s or supplier’s credit or trade credit (extending the definition of trade credit used by Coulibaly et al. [2011], to include both supplier’s and buyer’s credit), as opposed to ‘trade finance’ where a bank or a financial institution extends credit to either the buyer or seller to fund the trade cycle.

Does financing of trade involve exposure to significant risks for banks? Most bankers would agree to it, especially those who have seen the complexities of international trade financing closely for a number of years. While the importance of international trade financing cannot be overstated, the exposure of banks to different risks in financing international trade is significant. Is there an objective framework to evaluate such risks for banks? Even with the significant exposures that international trade financing brings, there is no objective criterion to measure or quantify the exposure of banks to such transactions.