SMEs, Supply Chain Finance, and Regulations

Transcription

1 2014/SOM2/CTI/DIA3/018 SMEs, Supply Chain Finance, and Regulations Submitted by: PSU, APEC Secretariat Public-Private Dialogue on Building Asia Pacific Partnership Through Global Value Chains Collaboration Qingdao, China 12 May 2014

2 SMEs, Supply Chain Finance, And Regulations APEC Public-Private Dialogue on Building Asia Pacific Partnership through Global Value Chains Collaboration 12 May 2014, Qingdao, China Presented by Gloria O. Pasadilla, Senior Analyst APEC Policy Support Unit (PSU) Advancing Free Trade for Asia-Pacific Prosperity Copyright 2012 APEC Secretariat. To help SMEs grow, gain and sustain access to GVCs, finance is IMPORTANT; lack of finance does not facilitate trade APEC, Small, Medium, Large Firms Enterprise Survey of APEC economies, all firms: Access to finance is biggest obstacle to business, especially for SMEs. Large firms consider manpower as main problem while financing is only ranked third. 1

3 Supply chain finance is one very promising solution to help finance sme suppliers in global supply chains. SCFs need the buyer, seller, lending institution integrated in one financing platform Simple illustration of one type of SCF (Receivables financing): MNC (Buyer) requests bank to structure a financing facility for its supplier which may go as follows: MNC MNC Usually at least 90 days term Lender MNC Benefits of SCF - SMEs are squeezed under increasing use of open account trade financing. In contrast to L/Cs, Open Account is akin to a buyer s credit for importers. Buyer s market position allows them to bargain for longer and longer terms of payment - SMEs squeezed for working capital due to long payment terms. Threat to supply chain system of buyer if supplier cannot deliver due to working capital constraints - SCF: helps supply chain stability by allowing payment to suppliers earlier (reduce DSO- Days Sale Outstanding), while also allowing buyers to have longer payment terms (increase DPO- Days Payable Outstanding) - Win for supplier, win for buyer, win for banks. - Credit is based on the back of credit worthiness of buyer 2

4 Would that reality were that simple! Many suppliers and not single supplier are usually involved in supply chain. Onboarding of each buyer in the platform requires multiple KYC effort by banks; Crossborder supplier and multiple regulations compound the issue. Hefty fines and tough regulations on banks on consumer due diligence and anti money laundering make banks overly cautious. High reserve requirement and other regulations under Basel 3 have made trade financing more costly for banks. Trade finance collateral damage from post GFC regulations Implication: reduced availability of trade financing lines and increased cost of financing Another major issue for sme financing is the quality of secured transactions law in various jurisdictions considering risks throughout the supply chain. The question for Fis is how secured is their collateral? Performance risk Confirming Bank Issuing Bank Transport risk Not only when it leaves port Exporter Traditional trade financing through L/Cs Importer Warehouse risk Mitigants: insurance, guarantees Transporter Warehouse Transporter Port services 3

5 What makes financing possible, despite risks, is if security interests can be cheaply and easily created, perfected, and enforced. APEC Economies have varied secured transaction index Financial institutions may still finance deals despite weak security interests but for a higher cost (costs of mitigants at each point of supply chain add up) With some foundations already available, lenders may overcome enabling environment constraints via: Control over collaterals Structuring of contracts Pre-arranged enforcement mechanisms Leveraging value chain resources Or, they don t enter certain markets because of very high risks => SMEs lose good source of finance There are SME-friendly market solutions alternative to traditional balance sheet-based financing through asset-based lending e.g. accounts receivables and/or inventory financing or other movable assets being used as collateral or scf, BUT IT REQUIRES: A clear legal framework with broad permissible scope and sufficient creditor rights A central and Internet-based Registry Supportive banking regulations and supervisory practice Including a friendly environment to create and operate non-deposittaking lending institutions (NDTL) Efficient and reliable support services (collateral management companies, credit enhancement companies, etc.) Availability (or possibility to create) e-platforms linking up value chain actors Source: Lai, J., Shanghai APFF Forum 4

6 Analysis of UNCITRAL cases give an idea of what can go wrong; possible areas for capacity building for SMEs Performance risk appears high in the list (quality, nonconformity, nondelivery). Transport risk, L/C related disputes, etc. Summary: SMEs can insert itself in global value chains as tier-n suppliers, but they need financing help Their weak balance sheets can be overcome through various asset based lending, and by Supply Chain Finance Asset based lending is facilitated by good regulatory environment where security interests are protected There is need to balance the need to protect financial stability through consumer due diligence and the need to lessen burden on Fis to do cross-border CDD. Passporting model used in the EU should be considered. 5