Why ‘SFMS’ is used for BG/LC and other trade finance messages?

The Ministry of Finance, Department of Financial Services Government of India in its letter dated 17th July 2012 had advised all the public sector banks that “No PSB can issue any LC or BG after 01.08.2012 except through SFMS system”. Further, the department has advised that the IFN 760 COY Bank Guarantee Message and IFN 767 COY Bank Guarantee Amendment Message formats shall be uniformly implemented by all the member banks with effect from 01.06.2015. Let us study here what is SFMS and why the Government made it obligatory for public sector banks to issue LCs/BGs only through SFMS.

The Structured Financial Messaging System (SFMS) is a secure messaging standard developed by the IDRBT (Institute for Development and Research in Banking Technology) Hyderabad to serve as a platform for intra-bank and inter-bank applications. SFMS is fulfilling requirements of domestic financial messaging actually an Indian variety similar to SWIFT (Society for Worldwide Interbank Financial Telecommunications) which is the international messaging system used for financial messaging globally.

SFMS is an EDI (Electronic Data Intervention) for banks and it uses INFINET as the communication medium. The SFMS is built on the lines of SWIFT but has many more utilities to offer. It has a number of features and modularized and web-enabled software, with a flexible architecture facilitating centralized or distributed deployment.  Banks secure intra-bank transactions messages by means of standard encryption and authentication services conforming to ISO standards. SFMS messages from a bank branch to another bank branch are delivered via Bank Gateways and the Hub located at IDRBT Hyderabad. The Hub and the bank gateway are connected via VSAT communication links or dedicated leased lines or dial-up lines depending on proximity and the volume of traffic with Bank Servers. The bank servers are connected to the branches in offline mode.

Advantages of SFMS:

The major advantage of SFMS is that it can be used practically for all purposes of secure communication within the bank and between banks. The intra-bank part of SFMS can be used by the banks to take full advantage of the secure messaging facility it provides. The inter-bank messaging part is useful for applications like Electronic Funds Transfer (EFT), Real-Time Gross Settlement System (RTGS), Delivery Versus Payments (DVP), Centralized Funds Management System (CFMS), etc. SFMS reduces transaction time, cost and makes trade finance operations more efficient.  The electronic handling of communications reduces considerable reduce risk of fraudulent transactions. SFMS facilitates inter-bank and intra-bank transactions in cash and securities, in treasury operations, forex transactions, Letters of Credits, and in the negotiation of bills drawn against the Letters of Credit. With SFMS banks would be able to avoid paper-based transactions.  The SFMS provides application program interfaces (APIs), which can be used to integrate existing and future applications with the SFMS. Banks and many state governments have been using the SFMS platform for NEFT transactions. The platform has demonstrated its resilience, security, and scalability. SFMS has been further opened for RRBs and Co-operative banks. In view of very few banks were offering Trade Finance services to mark the launch of the project IBA had requested all banks vide letter dated 27.08.2009 to join the SFMS platform for trade finance on the INFINET network connectivity as a secured messaging system.

The platform is capable of handling nonpayment applications like domestic LCs and Bank Guarantees (BG) in a secure and cost effective way. Only a few banks were using this as it was not mandatory for them and in the absence of which, banks cannot unilaterally send the messages to the beneficiary banks. Banks also cannot also have bilateral/multilateral agreements for this purpose due to feasibility issues. The Ministry of Finance, Department of Financial Services Government of India in its letter dated 17th July, 2012 had advised all the public sector banks that “No PSB can issue any LC or BG after 01.08.2012 except through SFMS system”. This is because there have been a number of cases of frauds in case of LC discounting and BGs which was a great cause of concern with regard to strategy of Public Sector Banks (PSBs). Therefore, it was felt use of SFMS mandatory in this regard which will help banks to establish a secure medium for transferring trade finance messages for sending and receiving LCs and BG instruments.

How it works?

Banks will continue to receive applications for Bank Guarantees (BG) as usual. But, along with the application, the banks will now obtain the name of the beneficiary, Bank of the Beneficiary, Branch IFSC/ an Advising Bank for the Bank Guarantee. The BG will be issued on the SFMS platform using Message Type IFN 760 or IFN 767 COY (for BG amendments). The message will be sent to the Beneficiary’s Bank/ Advising Bank through SFMS.  A hard copy of the Bank Guarantee clearly indicating that it is a ‘COPY ONLY’ is handed over to the Applicant for their use e.g. for attaching it with any Bid Documents.

On receipt of the BG message, the Advising bank will print the Bank Guarantee on Stamp Paper of required value or pay the required Stamp Duty by other means and then deliver the Bank Guarantee to the Beneficiary. The BG issuing Bank will reimburse the same to the Advising Bank through NEFT. In this regard, banks will amend their application cum counter-guarantee forms to incorporate a clause making the applicant liable for fees and Charges of the Advising Bank.