Suppliers in emerging markets in Asia are obviously a critical link in global trade – and that’s particularly true for small and medium-sized enterprises in the region. They are also absolutely vital for their countries’ economies. In Malaysia, for example, SMEs comprise 97% of businesses and account for 36% of GDP.
But as with SMEs almost everywhere, one of the biggest challenges they face is to get the cash they are owed in a timely fashion. And yet, supply chain finance is not a well-established or well-known tool – SMEs in Asian markets lack the awareness of its advantages, even though many of their large western customers may well be active users of SCF.
“For big buyers, it’s very well known and most of the big companies already use it,” says Sabine Oudart (pictured), relationship manager, supply chain finance programme, at the Asian Development Bank (ADB) in Singapore. “Maybe they don’t use it in Asia, but in their own region. For big companies, SCF is really well known and it’s a topic for discussion that we have in all trade finance conferences nowadays.
“But for small suppliers, in certain markets this is still something that they don’t really understand. It’s still a letters of credit-based market.”
ADB – founded in 1966 and now supported by 67 member states – is trying to change all that. It is working with major banks to make it easier for them to offer SCF to SME suppliers within the development bank’s list of 40 so-called developing member countries (DMCs – see box for list).
“Our mission is to help SME suppliers in emerging markets where we have a development mandate,” Oudart says.
Asian Development Bank’s Developing Member Countries (DMCs)
Afghanistan, Armenia, Azerbaijan, Bangladesh, Bhutan, Cambodia, People’s Republic of China, Cook Islands, Fiji, Georgia, India, Indonesia, Kazakhstan, Kiribati, Kyrgyz Republic, Lao People’s Democratic Republic, Malaysia, Maldives, Marshall Islands, Federated States of Micronesia, Mongolia, Myanmar, Nauru, Nepal, Pakistan, Palau, Papua New Guinea, Philippines, Samoa, Solomon Islands, Sri Lanka, Tajikistan, Thailand, Timor-Leste, Tonga, Turkmenistan, Tuvalu, Uzbekistan, Vanuatu, Viet Nam
In September 2016, for example, ADB signed a deal with Standard Chartered Bank Malaysia to make RM80m (US$20m) of SCF available to SMEs in that country. At least one other deal elsewhere in Asia has been completed but not announced and other deals are currently in the pipeline.
“We are a small team at the Asian Development Bank, so we don’t have the resources to do all the operational work to run a programme ourselves,” says Oudart. “We need to rely on banks – mainly, for the moment, global banks – with a good credit rating. We rely on their KYC [know your client] process, their operations process, IT platform, etc.”
What the banks get out of it by partnering with ADB is a reduced cost of capital: ADB is prepared in effect to provide a guarantee for up to half the SCF funds that a bank makes available in any particular deal, provided the bank matches what ADB is prepared to insure. “If, for instance, a bank asks us to take 30% of the risk, they also need to keep at least 30% of the risk,” Oudart says.
In return, because of ADB’s triple-A credit rating and its status as a development bank, owned by 48 member states in Asia and another 19 from elsewhere, the partner banks are entitled to 100% capital relief on the portion of the SCF funds that are insured by ADB. “This is usually the main incentive for banks to work with us,” Oudart says.
This facility is particularly useful if a partner bank has reached its credit limit with a corporate. “So instead of the company going to another bank, the bank can provide additional limits by getting credit risk mitigation with us,” she says. This can be a real help to SMEs in Asian emerging markets “which are not always covered by insurance or where the credit team of the bank doesn’t always have a lot of visibility. Even though the [bank’s] risk is on the big buyer, it still involves suppliers in Asia. If we take the risk, we give the partner bank comfort, as we have knowledge of the region, and they will also take a risk.”
Banks’ appetite for SCF
ADB has a limit at present of US$200m, which is not fully utilised but could well be by the end of this year, at which point a request will be submitted for a limit increase.
For now, the priority is to partner with larger, global banks. Few local banks have the appetite for doing supply chain finance deals. “This is still very, very new for them,” Oudart says. “That’s really the second step. It’s clearly a goal to also support local banks but the market in Asia is not at this stage yet.”
Local suppliers not only suffer from a lack of awareness but also from a fear that by doing a supply chain finance deal with a global bank that they will somehow adversely affect their relationship with their local bank. “So we sometimes struggle to convince the suppliers of the benefits of this type of programme,” she says.
The potential for pre-shipment finance
It’s also a challenge to get banks interested in pre-shipment finance. That would do wonders to get cash into the hands of suppliers when they are buying raw materials and components and paying factory workers, rather than having to wait until goods are on the ship before they can invoice and take advantage of reverse factoring offerings. ADB has some pilot projects that it is working on. “We see a lot of demand for this type of financing,” Oudart says. “Unfortunately we also struggle to find banks to partner with us on this. We get some direct requests from companies for their suppliers, but it is still very new in the region.
“Pre-shipment is a lot of work, as banks need to onboard all the suppliers but they may not get the benefits they are expecting in terms of pricing. It would help if big buyers keep some of the performance risk.”
ADB did its first SCF deal back in 2014, with Standard Chartered Bank in China. Not much activity took place after that, but Oudart’s arrival at ADB in January 2016 – from Standard Chartered, where she implemented the China deal – heralded a new energy for ADB’s SCF programme. Her role at ADB puts her in charge of implementing new partnerships with banks.
“Now we are really in a business development phase ready to have more partners and more business,” she says.
Indeed, the track record with Standard Chartered augers well for the development of the SCF programme at ADB. As Michael Vrontamitis, head of trade, product management, transaction banking, Standard Chartered Bank, said in a video interview last year, “We’ve had a long-standing partnership with ADB in order to help facilitate trade finance across Asia. Supply chain finance is a very critical part of reducing the overall trade finance gap. In order to increase financing to the SME segment, I encourage banks to look at ADB as a potential partner to enable additional credit, liquidity and capital to the segment.”
Sabine Oudart is a speaker at the first-ever SCF Forum Asia, taking place in Singapore on 6th June 2017. Agenda and registration details available by clicking here.