Asia is expected to lead the growth of supply chain finance according to Singapore Ministry of Trade parliamentary secretary Low Yen Ling, who delivered the keynote address at the International Chamber of Commerce’s (ICC) supply chain financing (SCF) summit in Singapore on March 9.
“We are seeing new developments in the centre of gravity in Asia,” she says, with two-thirds of commodities supplied globally coming from Asia and the region having a hand in shaping SCF.
Key trends in SCF
Data from the most recent ICC Market Intelligence survey confirms the importance of growth in Asia. As background, global trade was growing 10% per annum from 2000 onwards and growth was twice the rate of gross domestic product (GDP), says ICC education and market intelligence group chair Vincent O’Brien. However, in the wake of the global financial crisis, trade collapsed by 20% to 25% in 2009. Growth resumed the following year, but dropped again by 12% to 15% in terms of value in 2015.
The region that is getting real traction now in SCF is Asia, according to HSBC’s regional head of solutions structuring, Jose Lopez-Mateos. The only regions where operational cash flow growth adjusted by revenue growth is above zero are Asia and Middle East Africa, so those are the areas where clients are asking for SCF the most.
Vijay Vashist, global head of trade and SCF for Singapore multinational banking group DBS, highlights factoring as a key trend in SCF. The growth rate has been even more pronounced in Asia, driven by cross-border trade from manufacturing powerhouses supplying to various locations and by factoring in China growing at a “staggering” level of nearly 15%. One reason for the growth cited by Vashist is that payment terms average more than 80 days in Asia, compared to about 50 days globally.
Along with small- to medium enterprises (SMEs) continuing their usage of factoring, there has been a dimensional change in growth from different segments since 2010, with all of the world’s 500 largest corporates now using factoring or SCF in purchase or sales. Specialist financial technology firms – not only fintechs but also the technology platforms – are contributing to that growth and efficiency.
Looking ahead, Lopez-Mateos sees SCF becoming totally different over the next five years, with changes including an increased need for reverse factoring without the supplier reducing their overdraft with banks, as well as banks or third parties developing the radically different intuitive platforms that companies now require.
Supply chain and financing in Asia
SCF in Asia has indeed come a long way, agrees Shivkumar Seerapu, Deutsche Bank’s regional head – trade and supply chain, with the growth rates in SCF outpacing the growth in other types of trade finance. He breaks down its development into four waves of evolution. Having started with a focus on the size of financing and pricing 10 years ago, financing then moved on to suppliers looking at how to do automation and host-to-host (H2H) connectivity. A third wave followed, where suppliers looked beyond purchase order management to warehousing and automatic matching of purchase orders. Seerapu now sees a fourth wave kicking off, with multi-bank syndicated programmes that have one bank as the core platform provider and five or six banks coming in for funding.
Looking ahead, DBS’s head of SCF, Nicole Wong sees a fifth wave emerging to embrace the whole ecosystem. While multinational banks don’t have the footprint to support suppliers, they can work with regional or local banks to expand their financing solutions. Development of this wave will, however, require regional banks to develop both a solid credit programme that enables onboarding of pre-shipment financing to be conducted on a massive basis and an understanding of the business model of the anchor that considers how they buy and sell as well, as the seasonal impacts and their strategic suppliers. Regional or local banks can also use their relationships with distributors and supply chain linkages, as well as post-financing monitoring, to enhance their capabilities.
Turning to the SME market, Oversea-China Banking Corporation’s (OCBC) head of cash management, Greg Trotter, reports that Asian SMEs are looking at pricing and at leveraging alternative SCF products – amid an economic slowdown. Banks are reducing credit and SMEs are among the first to be affected. They are also seeking further options, such as receivable discounting, and they are using SCF to secure and maintain business.
SWIFT’s commercial director, Damien Dugauquier, sees that SMEs need financing before the invoice is approved so that they can buy raw materials or other supplies. However, in his experience the current solutions are usually buyer-centric, whereby banks support multinational buyers.
Insuring the risk
One solution for corporates and banks responding to the more challenging economic environment is insurance. Stephen Capon, regional manager for insurance group Chubb, acknowledges that “there’s an uptick in losses now. It started last year. People are adjusting their risk appetite. Pricing is hardening. The number of banks trying to offload is extraordinary.”
The fundamental challenge, according to Capon, is getting the message to banks about partnerships. The amount of trade flow business with banks has dropped by 75%; by contrast with corporates it has grown 20-fold. “Post-crisis, a lot of (large) corporates are awash in cash and it’s about risk mitigation through risk protection, especially in emerging markets.”
He then sees “backward engineering into the banks,” whereby corporates are approaching insurers and then going to the bank. “You’ll see increasing partnerships between insurers and big banks and alternative finance,” he predicts.
Standard terminology for SCF
Among the biggest challenges for providers of SCF has been multiple interpretations of the term actually means. The release of the Standard Definitions of Techniques for Supply Chain Finance at the Singapore summit will go a long way towards increasing efficiency in the industry by resolving difficulties caused by semantics.
The challenge with varying terminology, according to Christian Hausherr, Deutsche Bank’s head of SCF Europe, is that the multiple interpretations were confusing, fragmented and ambiguous. Since different banks, regions and industries had different understandings of SCF, it was often difficult for corporates to understand what they were getting and for financial institutions to work together to provide services.
The ICC and five partners stepped in to create a global SCF forum, with both a steering and a drafting group that included a diversity of participants who could provide input from multiple perspectives. The mandate, as Hausherr described it, was to define the key aspects of SCF, including participants, legal relationships, risks and benefits.
The group ensured that the drafting process was inclusive and achieved consensus, reports Vinod Madhavan, Standard Bank’s head of transactional products and services. In addition to meetings, the groups conducted peer reviews to ensure they developed a consistent look and feel and also that the language made sense to a non-practitioner.
Standard definitions help to grow the industry
For Charles Bryant, senior advisor to the Euro Banking Association (EBA), SCF may be defined as the use of financing and risk mitigation practices and techniques to optimise management of the working capital and liquidity invested in supply chain processes and transactions. The terminology then provides standard definitions for techniques in SCF rather than for products, as techniques are components of products.
The total of eight techniques is clustered into two groups; one for receivables purchase and the other for loan or advance against receivable. Bank Payment Obligation (BPO) is also included, as an enabling framework for SCF rather than as a technique.
Bryant believes the key benefit of the terminology is that it provides clarity and transparency for communications, which is especially beneficial when explaining to non-bank investors what they are buying. Madhavan adds that the document also enables product managers to tell their counterparts to refer to the definitions. That consistency and clarity is crucial for the development and growth of SCF.
The full document may be accessed here.
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