In a first of its kind transaction in India, Kotak Mahindra Bank enabled end to end trade financing for one of its clients by applying the blockchain technology. By utilising the blockchain technology, time for processing the letter of credit (LC) reduced from 20-30 days to few hours. For this transaction Kotak Mahindra Bank had partnered with Deloitte. JP Morgan Singapore was the partner bank.
Letter of Credit (LC):
LC is a written commitment to pay by buyer’s/importer’s bank to seller’s/exporter’s bank.
- The LC guarantees payment when prescribed list of documents are provided by the seller/exporter within the stipulated timeframe.
- The processing of LC involves levels of approvals and verification to be carried out by multiple parties often located in different countries. Thus it is a tedious and time consuming process.
What is blockchain technology?
Blockchain is an unalterable public ledger (in digital form) of economic transactions/activity recorded in a chronological order.
- Initial use of blockchain technology can be traced back to evolution of digital currency Bitcoin in year 2008.
- Besides trade finance, blockchain technology is being adopted by financial organisations across the world for cross border payments, trade settlements, foreign exchange settlements and commodities Exchange.
- Enhanced operational efficiency, transparency, security, no downtime and auditing convenience are key benefits accruing from adoption of blockchain technology.
Blockchain technology in India:
- In October 2016, ICICI Bank partnered with UAE’s banking group Emirates NBD and Infosys Finacle to complete blockchain-based transactions in international trade finance and remittances.
- In January 2017, YES Bank implemented multi-nodal blockchain solution to completely digitize vendor financing for Bajaj Electricals.
- In January 2017, Axis Bank also resorted to blockchain for cross-border remittances by partnering with Ripple blockchain provider.
- Several Indian banks are now forming a detailed roadmap for providing blockchain based banking solutions on commercial basis.