Speaking at the EuroFinance International Cash, Treasury & Risk Management conference in Singapore, Lam notes that treasurers have seen many new regulations in the past two years and he expects more, with more and more documentation requirements. A key risk, he adds, is that the operations team in payables and treasury may misunderstand the rules, which could cause compliance issues. Management needs to make sure the team understands the regulations and their reporting obligations.
For domestic trade finance, Lam said the supply chain financing program his firm put in place is not welcomed by suppliers because they are used to being paid by a bank acceptance draft (BAD), which is similar to a letter of credit (LCs). BADs offer more options for the receiver. Companies can hold the BAD and bank it in at maturity or discount it at their bank, similar to LCs.
Alternatively, a supplier can endorse a BAD to its own supplier, and the endorsement process makes the BAD more popular than supply chain financing. “When we invite suppliers to join the supplier financing program, they say they have no cost if they use BADs and they cannot endorse supply chain financing,” Lam explains. While suppliers like BADs, many foreign companies do not use them and foreign banks are not very familiar with them.
BADs have their own constraints and disadvantages, Lam says. They have a low handling fee for the bank, so only large companies can issue them. Local banks also may require 10%-50% of the value in a deposit, so BADs may tie up a company’s cash. And at least 20% of suppliers will not accept foreign bank BADs because they are worried they may not be able to discount them or endorse them, as foreign banks have a quota. Furthermore, a paper BAD is risky because it is the equivalent of cash.
Comparing local banks and multinational banks, Lam says pricing at multinational banks is generally lower, although local banks are cheaper for FX for large dividend payments. Since local China banks are more prudent, it is hard to ensure the stability of their support of BAD facilities – at year-end, local banks want out of their lending quota, so they can’t support Lam’s company in BAD and the firm has to rely on foreign banks.
Local banks are experts in BAD and better at local regulation support. Lam notes that it is also important to have a policy on accepting gifts from local banks. Foreign banks, on the other hand, can be better at relationship management.
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