Traders embrace fundamental tenets of risk

A return to risk mitigation and the emergence of distributor finance are leading to a renewed focus on the financial supply chain in Asia-Pacific trade.

Sometimes it takes a crisis for people to get their priorities straight. Few managers sweat the details when margins are fat and revenue is growing strongly. But that isn’t happening anymore. Today, with anorexic margins and anaemic revenues, it is impossible to ignore the need for getting back to basics.

This is particularly true for large global businesses. Markets in the US and Europe are stagnating, which has led many multinational companies (MNCs) to re-focus their efforts in Asia, while also paying attention to boring details that seemed less important in the bull market, such as mitigating the risks in their financial supply chain and winning small efficiency gains – the nuts and bolts of global trade.

“Broadly speaking, the industry stepped away from the fundamental tenets of risk management and risk adjusted profitability,” said Pravin Advani, global trade executive, Asia, in J.P. Morgan’s treasury services team. “There is a greater focus on fundamentals. Banks are concentrating on what they are good at, and are being better at understanding what it is that a client actually needs, and then working to provide that service in a cost-effective manner.”

The difficulty of getting private insurance in the wake of the credit crisis has further heightened the relevance of the financial supply chain in risk mitigation. At the same time, many multinationals find themselves at the mercy of large buyers, who have developed a tendency recently to extend their terms and pay later, resulting in growing accounts receivables for sellers.

“We have seen an overwhelming focus recently by banks and corporates who are recognising the importance of risk management,” said Advani. “Over the last couple of years, through a mixture of choice and necessity, banks and corporates alike have become much more intent on peeling back the paint to look for the risk inherent in a business proposition or process.”

Asia-Pacific’s role as a revenue generator for multinationals — and not simply as a manufacturing centre — is encouraging another related trend, say the banks, in the form of distributor financing. Surging sales in the region, especially by US technology companies, are prompting multinationals to ask banks to extend financing to their distributors to help ensure they stay in business. As such, distributors are no longer taking a back seat to suppliers when it comes to financing, “either with regard to volume or mandates,” notes one banker.

This marks a step beyond the financial supply chain’s traditional role of increasing cash flow, mitigating risk and reducing cost of funds for key suppliers. “Corporates are looking at their distribution channels,” said Ravi Saxena, Citi’s head of trade, Asia Pacific global transaction services. “The more their sales grow, the more they consider the financial risk they are running on these entities, so they look to banks to mitigate some of that risk.”

Distributor finance can also help multinationals to grow the bottom line, according to Shivkumar Seerapu, Deutsche Bank’s regional product head for trade finance, Asia, and global product head for financial supply chain. “They see distributor finance as a means to help their distributors buy more of their products, and as a result it is a tool to increase their sales in Asia.”

This development is not without its challenges. For their part, aside from gaining more business, banks need to ensure their credit frameworks are able to efficiently assess the credit risk of these distributors. These networks are mainly comprised of numerous small and medium-sized enterprises (SMEs), which have traditionally not fallen within the scope of bank credit frameworks. “These customised credit models look at distributors not as stand-alone SMEs, but as vital components of clients’ corporate supply or distribution chains,” said Seerapu.

Responding to this growing preponderance of SMEs in Asia’s evolving financial supply chain, banks have had to adapt their services. Standard Chartered Bank, for instance, uses its specialised SME team from the consumer bank to meet the needs of small businesses.

“SMEs within the financial supply chains of our global MNCs are managed by the SME team, but on the same risk and processing systems [as the wholesale bank],” said Karen Fawcett, Standard Chartered’s senior managing director and group head of transaction banking and wholesale banking. “This means the set of products they are offered are absolutely tailored for their needs. We launched our supply chain suite of products about 10 years ago domestically in India, and have been expanding it ever since both domestically and cross-border.”

Local adoption

On the other side of the coin, local companies are also expanding overseas and expecting more advanced banking services. The pace of SME take-up of new financial supply chain technology should not be exaggerated, but banks are reporting growing recognition among such companies of the need for electronic platforms and straight-through processing.

“We have observed that the CFOs and treasury managers in local Asian corporates are more open to using financial supply chain tools to improve their working capital and cash conversion cycle, compared to a decade ago,” said Tom McCabe, managing director and head of global transaction services at DBS Bank Asia-Pacific. “While there is certainly greater awareness of financial supply chain solutions among Asian corporates, technology take-up is somewhat slower in Asia compared to Europe or the US.”

You can take a horse to water, but you can’t make it drink — especially if it isn’t thirsty; and many Asian businesses are simply not thirsty. This is even the case in the Asia bases of Western multinationals. Banks report that bridging the gap between a company’s local Asia-Pacific operations and its corporate headquarters in the US or Europe is not always an easy one, and can have a profound effect on the financial supply chain. “The reality of the implementation, and how far the mandate filters through the ranks of an organisation, may be markedly different from the intent. This is critical to the success or failure of an initiative,” said J.P. Morgan’s Advani.

Some multinationals are also asking banks to take a structure rolled out in one country or region and replicate it in another, even with different bank providers. “This new trend has significant implication for banks as it all points towards greater efficiency for the client wanting to retain the original solution, but is more challenging for banks if the client should decide to work with another bank in a different country and requests for this bank to replicate a solution exactly like that of the original bank. We have seen this happening with some corporates in Asia this year,” noted Deutsche Bank’s Seerapu.

Even so, it shows that businesses are thinking much more about the basics and trying to get them right. This is a positive development and one, with luck, that will form the foundation for the next phase of global growth.

This story was first published in the October 2010 issue of FinanceAsia magazine.

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