Supply Chain Finance Business Higher on Asia-Pacific Banks’ Agendas

Wooden mannequins pushing puzzle pieces into the right placeAite Group recently conducted a survey in Thailand, Indonesia and Australia to gauge the current state of supply chain finance (SCF) adoption among banks operating in the Asia-Pacific region. It found that SCF business is now firmly on the agendas of Thai banks and is seen as a business generator for Indonesian banks. While it’s on the agendas of the Australian banks, technology isn’t perceived as offering the necessary support for SCF-related programs.

I asked Enrico Camerinelli, senior analyst in wholesale banking at Aite Group, why the Australian banks have that perception and exactly what they perceive as being the necessary support. He explained  that banks tend to look first at the products they can sell, and then at the enabling technologies to create the proper infrastructure. This is especially because enabling technologies (SCF enablers) usually don’t generate revenue for banks. Electronic invoicing, for instance, is an SCF enabling technology but banks typically can’t charge for it; it’s simply a cost of doing business. Not surprisingly, they’re reluctant to invest in a service they can’t subsidize, particularly in the current economic environment.

In countries where banks traditionally have assisted their local corporate clients in import-export trade-related business, SCF solutions are accompanied by other services that emphasize collaboration. Such services include supplier evaluation, supplier scoring, go-to-market support, lead generation, education on local practices and support in handling local administrative duties.

Interestingly, Aite Group’s study revealed that the domestic market conditions, economic dynamism and level of maturity in SCF awareness influence the decision to invest in SCF products versus services. When domestic market conditions show signs of growth, trends of economic dynamism are positive and the level of maturity in SCF awareness is high, banks should invest in SCF enablers/services. In the opposite conditions, banks should invest in SCF products.

One of the takeaways from Aite Group’s report is that software for SCF enablers is currently in demand from financial institutions in dynamic Asia-Pacific economies. As such, SCF software vendors have an opportunity to supply cash management, liquidity management and trade finance applications for building multibank collaborative platforms. These platforms allow corporate treasurers to have total visibility of cash positions and liquidity pools across all bank accounts. Additionally, they can exchange electronic invoices in any format, as well as issue payments from any bank account and in any format.

Aite Group’s new report is entitled Supply Chain Finance in the Asia-Pacific.

Strengthening the Chain

Supply ChainSmall to medium sized enterprises (SMEs) play a critical role in supply chains in Asia. While these companies are important drivers of growth in the region, they face major challenges when it comes to obtaining finance. The SWIFT Institute funded the Malaysia Institute for Supply Chain Innovation, part of the MIT Global SCALE (Supply Chain and Logistics Excellence) Network, to research this issue. An interim white paper was published on March 10, 2013, and the final working paper will be issued in mid-2013.

Most countries are trying to create policy frameworks, regulations, financial institutions and rating agencies to promote the growth of SMEs, and it cites several examples. Yet there are myriad limiting factors.

On the demand side, lack of education, motivation and entrepreneurship prevents business owners from seeking finance to grow their business. On the supply side, it’s hard for financial institutions to get accurate and detailed information about borrowers. Borrowers lack the documentation, bills and receipts to prove they have the cash flow to repay the loan. They tend to rent or lease assets, so they can’t demonstrate that they have collateral to ensure against default. Credit rating agencies often are unreliable. As a result, when financial institutions do lend, they charge high interest rates. Other deterrents include high transaction and loan administration costs, legal bureaucracy and restrictions, and the lack of systems to enforce and monitor the rules for lending and borrowing.

Some innovative lending models have been introduced at the product, process and institution levels. The paper mentions India’s Kisan Credit Card (KCC) scheme to reduce the cost and the administrative burden associated with small loans. Other initiatives in that country include crop insurance, warehouse receipt financing smart cards and Self-Help Groups (SHGs). Thailand’s Bank, Agriculture and Agricultural Co-operative introduced the Joint Liability Group (JLG) to streamline screening, administration and enforcement.  Meanwhile, governments are increasing financial resources for SMEs and writing off their bad debts. Some banks offer low interest rate loans and have dedicated funds for agriculture. Additionally, NGOs and private organization are providing support in the areas of credit, market access and the development of SHGs.

Financial institutions can help their multi-national customers by supporting their supply chain. And by providing finance to SMEs, hopefully these companies one day will grow into bigger customers. However, developing products that meet their unique needs is only one part of the equation. It’s critical to support the financial reform process and help build the necessary infrastructure that will enable companies to thrive and compete.

  • What do you think are the major barriers to SME lending in Asia?
  • What can financial institutions do to alleviate these problems?
  • Is there anything in the new banking regulations (Basel III etc.) that help or hinder progress?