Asian Development Bank (ADB) announced recently that it has partnered with Standard Chartered Bank (SCB) on supply chain finance program (SCFP) in the amount of USD 800m to support Asian SMEs facing payment pressure from the big domestic buyers. It is a good news but the structure is not innovative at all.
Our points are:
1) Commercial risk (or so called payment risk of the buyers) of trade finance has been treated as a matured product in many developed countries which had spun off most of the services from export credit agencies (ECA) to private credit insurance companies long time ago. That is why Euler -Hermes, Atradius, and Coface were established.
Sinosure of China, maybe the largest one in term of turnover in 2013, was established in 2001. From experience, many commercial banks including HSBC, DBS, Mega Bank of Taiwan, and Bank of China have used the service as safety net to prevent the commercial risk of trade finance.
Why doesn't ADB take any international buyers' payment risk directly before, and [now] all of a sudden starts to take payment risk of domestic buyers located in various Asian countries through SCB's network? Risk of supply chain finance is a typical credit insurance business.
If SCB is using one of those credit insurance companies' services, ADB is sharing buyers' credit risk mainly with credit insurance companies, not SCB. So it should use credit insurer not bank as partner, since most of the commercial banks are facing strick regulations under Basel III while credit insurance businesses are fast growing .
2) As far as SCF is concerned, most of the commercial banks in Asia have had their ways of preventing risk or just taking risk by themselves. There is a big demand for credit risk sharing in this aspect.
In the case of Taiwan, many banks share risk with state-owned credit guarantee fund (SMEG) or credit insurance to support trade finance for SMEs. On some cases, SMEG is even replaced by credit insurance companies due to the lower premium offered to the end users.
And for the first time in 2013, SMEG of Taiwan has developed a product together with credit insurer (Euler-Hermes), to cover both the risk before account receivable is recognized and the risk of account receivable of the buyer. In other words, it covers the credit risk from the moment that contract is signed till the time the goods is accepted by the buyer.
It is well accepted by the SMEs since many international buyers, either from developed country or emerging countries, are used to "Open Account " term than LC nowadays.
3) Since two decades ago, many SMEs have been facing waning Letter of Credit (LC) as payment tool from not only international buyers but also domestic buyers. As a result, LCs from banks cannot facilitate many transaction where main SMEs businesses are conducted.
Very often, big buyers are reluctant to issue LC for payment and nearly all SMEs are not in the position to fight back especially when the future business is to be fixed and margin looks OK vis-a-vis many forecasts of bleak global economy. Many commercial banks, maybe including SCB, are using credit insurance to support SMEs finance not only for SCF but also for international trade finance.
It is inconsistent that if ADB supports the domestic part of the trade finance under SCFP but insists that the international trade finance still has to against bank instrument like LC. Since credit insurance can cover both, why not bringing in credit insurers for a total solution for SMEs?
4) Compared to European Bank of Reconstruction and Development (EBRD), and World Bank (WB), ADB is at least stepping out and doing something more on trade facilitation than the others which are still following conventional practices. In fact, if ADB puts more efforts on the field of credit risks management for trade finance and SCF, it can easily generated a great deal of trade opportunities among its 67 member countries.
Especially IT services are so popular with no capacity restriction and only limited investment. The accumulation of track records of trade will be unbelievable valuable in the long run.
What we are commenting here is an open secret. If ADB doesn't take it seriously, we are sure of one thing i.e. companies such as Alibaba, which is brokering trades and entering banking business rapidly, are going to do it soon.
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Asian Banking & Finance. The author was not remunerated for this article.
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Eugene Chen 陳仲漁 is currently the Managing Director and co-owner of Grand Aspect International, a consultant company. He is also one of the Turn Around Managers of European Bank of Reconstruction and Development (EBRD). He is an expert in Green Energy and Trade Finance.