thecorporatetreasurer.com2 corporate treasurer APRIL / MAY 2016

L onger payables terms mean more cash on-hand, one of the fundamental principals in working capital management. For suppliers, many of whom

are small- and medium-sized enterprises (SMEs), such terms hurt their ability to purchase raw materials and goods for production – leaving the whole supply chain at risk. However, a shrinking appetite amongs banks to lend to the SMEs makes the situation even worse.

Direct bank loans and facilities extended to SMEs declined over the course of the global fi nancial crisis, according to the Asian Development Bank (ADB). In 2014, SMEs only received 18.7% of total bank loans in Asia, even though they contributed 42% of economic output in the region, the ADB revealed in September, 2015.

This is where indirect credit, such as supply chain fi nance (SCF), comes

Corporate treasurers must play a crucial role in getting capital to � ow smoothly

along supply chains

SAVE OUR

SUPPLIERS

thecorporatetreasurer.com2 corporate treasurer APRIL / MAY 2016

Ann Shi reports

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thecorporatetreasurer.com APRIL / MAY 2016 corporate treasurer 29

supply chain management

Joerg ayrle, right, thai union group

into play. Relying on a buyer’s lines of credit with a relationship bank, SCF can allow a supplier to sell approved invoices to the buyer’s bank at a discount and immediately receive the capital needed for production from the buyer’s bank.

Bank offeringsStill, only the top 15% to 30% suppliers of a bank’s major corporate clients can secure financing via the SCF route, according to Anand Pande, former global head of trade at RBS and now founder of The Growth Paradigm Partnership. Banks are unable to serve the rest of the suppliers, said Pande.

Bankers may talk a good game, but fundamentally, SCF is not an area that they focus on. Even among the “SCF strong banks”, who claim to be leaders in this area, SCF only accounts for up to 25% of their trade revenues, Pande said.

Current bank SCF offerings mostly require suppliers to enlist with the buyer’s bank portal. A host of reasons – including rising levels of poorly performing loans, and compliance requirements on banks such as know-your-customer (KYC) or Foreign Account Tax Compliance Act (FATCA) – have impacted banks’ credit allocation to suppliers, limiting their scope.

While banks have the power to decide the end beneficiary suppliers from SCF offerings, buyers should bargain as hard as possible to influence this decision.

For example, as General Electric (GE) is building a plant in Nigeria to support its oil and gas work there, the company started a financing programme with its small- and medium-sized suppliers in the country.

GE brought about five banks “it knows very well” on board, and demanded that they offer financing to the local suppliers, John Rice, Hong Kong-based vice-chairman of General Electric, told The Corporate Treasurer at the 2016 Asia-Global Dialogue conference held in Hong Kong in January.

“In securing our [GE] business with the suppliers… you will secure yours with us,” Rice said, referring to the message GE conveyed to the banks. “Otherwise, they [the local suppliers] won’t get capital,” he added.

get kyc cleverOf course, not every company

has the bargaining power of a global conglomerate like GE. But there are less strong-arm approaches to making credit more accessible to suppliers.

For example, to tackle issues like KYC compliance, Thai Union Group (TU), a Thailand-based producer of seafood-based food products, chooses to partner with banks originating in the country of residence of the supplier.

“We connect a partner bank to our suppliers and arrange for the supplier to receive cash against its accounts receivable with TU,” said Joerg Ayrle, CFO of TU. The bank charges “more or less the same working capital interest” rate as they charge TU, according to Ayrle, and TU gets to extend payment terms by 30-45 days.

alternatives? More recent solutions involve non-bank players that rely on technology to ease the burden on suppliers.

Swift offers a BPO [bank payment obligation] solution by providing trade-data-matching service through a trade services utility (TSU). Using correspondent banking networks to reach out to a larger number of suppliers including SMEs, the TSU/ BPO can eliminate the need for the buyers’ banks to on-board suppliers, as well as the related KYC costs.

And Finocap is an example of a marketplace that provides dynamic discounting as an alternative to supply chain financing. The processes bypass the involvement of a bank (except payments), hence are not restrained by issues like KYC costs, according to Rajah Chaudhry, founder and managing director of Finocap.

The theory is good, but adoption rates for these solutions are not high enough to make a real economic difference.

There are only more than 55 corporate relationships live on BPO, according to Swift on March

30. Launched in January in Hong Kong, Finocap has to date signed five buyers, most

recently Hong Kong-based telecom company HKT and its holding

company PCCW. The fintech company is in the process of bringing them onto its platform at press time.

chicken and eggWhat’s holding back the adoption? It’s easy (and occasionally fun) to lay the blame with the banks and the regulators but corporate treasury departments are in the firing line too.

Treasury and finance leaders are inherently conservative and even if some of them realise the merits of new technology and products, they don’t necessarily want to be at the forefront of implementation.

Speaking at CT Week in March in Singapore, Christopher Emslie, Singapore-based country treasurer at ABB, made a confession: “We are not just seeing banks any more; we are seeing more and more fintech companies to provide solutions. As treasurers, we feel like we are cutting edge, we knew the trends, and we are ready to transit and move with the times… but really, we are conservative.” And that means a new solution needs to be “proven” first, said Emslie.

“Whenever our banks or some third-party providers present a new solution to us, a question we always ask is: ‘Who else is using it?’” Pui Yee Lee, corporate treasurer at Kulicke & Soffa, told The Corporate Treasurer on the sidelines of CT Week.

a question of timingThe question is: is now the time to change? According to André Casterman, member of Executive Committee of Banking Commission, International Chamber of Commerce (ICC) and chief marketing officer at financial data management vendor INTIX, the answer is yes.

“The key next step is for corporates to make the move. Once corporates increase their focus and efforts on SCF, banks follow suit,” said Casterman.

The technology is available, the rules (for example, ICC BPO) are available, the technology vendors are ready but banks and corporates are not moving fast enough as both are waiting for the other to make the move, Casterman added.

“If your remaining 70% - 85% of suppliers can’t have credit access via traditional bank SCF channels, why can’t you look at something else?” asked Pande. You can, and you should. You never know, you could get a very good price for buying a new solution first. n

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