Amit Agarwal, MD and group head of trade products, Global Transaction Services at DBS Bank, provides an overview of the Asia Pacific trade industry, from the challenges brought about by geopolitical tensions and economic uncertainty, to the opportunities arising from regulatory support and technological advancements.

 

The trade industry in Asia Pacific is experiencing turbulent times as geopolitical challenges and macroeconomic uncertainty affect trade volumes and financing in the region.

Ongoing geopolitical tensions between the big markets continue to stoke movement among Western companies to explore nearshoring or diversification strategies, resulting in impacts on the trade finance market. While the full effect of these shifts from a trade finance perspective is only likely to emerge over the next two to three years once capex investments have been made, procurement for many goods has started to move to Southeast Asia, Mexico and India, reducing China’s direct market share to the Western world.

Compounding issues is the broader slowdown in the domestic Chinese economy — headwinds in the real estate sector1 have led to overall slower, though still positive, trade growth in Asia Pacific in 2023.

Against this backdrop, a key avenue for growth in many Asian economies (including India) will be the considerable spend expected on infrastructure projects by governments and through public-private partnerships. The participation of mid-cap companies and small and medium-sized enterprises (SMEs) in this space will also play a critical role in moving these projects forward.

For now, Asia’s cross-border trade finance market has also been hit by the high interest rate environment.

High US dollar interest rates are making companies reluctant to borrow from banks, and resulting in many of them turning to internal cash flows to manage their working capital. While large corporations have the cash required to do this, SMEs continue to pay high interest rates when borrowing from banks.

 

Hurdles to SME trade financing access

SMEs account for a large share of enterprises and jobs globally, but face higher trade costs and have less access to financing. According to the Asian Development Bank,2 roughly 43% of SMEs report having unmet financing needs, resulting in the global trade finance gap expanding from US$1.7tn to US$2.5tn3 in two years.

While these numbers are daunting, the reality on the ground is more nuanced.

For the most part, larger SMEs (firms with a turnover of more than US$20mn) tend to be sufficiently banked, especially in major Asian markets like India and China. However, in instances where SMEs can access financing, these loans usually come in the form of secured financing – which depends on businesses pledging their fixed assets as collateral – and at very high interest rates. That can limit profitability and constrain SMEs’ expansion and growth potential.

Additionally, conventional trade finance is intrinsically expensive for banks to service, with high operational costs incurred in processing reams of documentation, security perfection, validating data, and so on. Banks have historically found it challenging to provide low-cost trade financing to SMEs.

The industry must do more to enable an inclusive trade financing environment, given the crucial role it plays in supporting trade, and in financing sustainable development. Achieving net-zero targets, for example, hinges on more democratic access to sustainable trade financing. Investing more time and resources into supporting SMEs is key to driving the sustainability agenda for the large upstream corporates.

In our view, two aspects are going to be key in broadening access to financing solutions and spurring development worldwide: regulation and technology.

 

The driving force of regulation

We are seeing heartening developments in the regulatory landscape in large markets such as India, China and Vietnam, with policymakers developing new rules that actively support more trade finance by creating laws that enable these forms of lending. For example, the creation of trade receivable registries enables banks to log their rights over these exposures and reduce losses on account of double financing issues.

Other regulations take a more direct approach. In India, the launch of the Reserve Bank of India’s Trade Receivables Discounting System (TReDS)4 has already led to the collateral-free trade financing of more than US$14bn of domestic trade in 2023. Changes in trade credit insurance guidelines and the launch of Gift City, an international financial centre, aim to multiply the success and expand benefits to cross-border trade as well.

In China, regulators have been avid supporters of trade financing for decades. Most recently, in 2023, the State Administration of Foreign Exchange introduced nine new measures5 to facilitate cross-border trade, investment and financing to help stabilise foreign trade and investment.

 

Technology as a catalyst

While favourable regulations can help spur trade financing, effectively managing and cutting operational costs will have an equal impact and result in lower-cost trade finance. This will come about by leveraging digital technologies to save resources spent on tedious document evaluations or time-consuming onboarding processes.

These technological changes are occurring in different ways.

Digital marketing, for one, is dramatically broadening the reach of banks to quickly market trade finance solutions to a vast customer base. Until now, SMEs with turnovers of less than US$20mn faced challenges in accessing trade finance due to the high costs associated with acquisition and servicing. Leveraging artificial intelligence (AI) for customer servicing and transaction processing can change this. Fintechs have taken the lead in this regard, but established institutions like DBS Bank are also heavily investing in this space.

Secondly, industry-grade digital information services are helping to streamline trade transaction processing such as document verification processes. In India, for example, banks have been able to readily access GST information6 online since 2017 to enable rapid verification of invoice data, which means they do not need to physically screen paper trade documents to weed out fraudsters. In Singapore, meanwhile, the MAS-sponsored trade finance registry7 will also help banks identify duplicate invoice financing.

A third aspect is the e-commerce wave, which has significantly expanded Asia Pacific’s trade industry over the past few years and helped create a new crop of digital solutions to tackle more niche segments. For smaller SMEs in this sector, banks leverage an alternative lending model known as “cloud cashflow-based financing” that plugs banking solutions into existing e-commerce platforms. Through these partnerships, banks can obtain an in-depth history of suppliers’ trade volumes and a range of non-financial factors that allow the bank to assess SMEs’ creditworthiness without traditional documentation. For example, DBS Bank has collaborated with Infor Nexus to co-create a digital, data-led financing programme for the company’s clients, and this delivers trade financing quickly and efficiently. The platform helps Infor Nexus’ customers get financing support from DBS, while the bank gains access to a broad network of suppliers. Leveraging such types of partnerships, DBS Bank has worked with over 300 clients and more than 9,000 suppliers to date to enhance connectivity in digital supply chain financing.

 

A future still in flux

Beyond the technological changes, there is much excitement around the potential for blockchain technologies to revolutionise trade financing, but the reality is that in the present context, simple automation will have a larger impact on documentation processes and help streamline trade finance. Generative AI can play an important role as a general-use technology that will have influences across organisations and accelerate the pace of backend office operations, similarly affecting trade finance.

Increasingly, however, with a sharpening focus on the future of the planet, trade finance will become more and more closely linked with sustainable business practices. Across many sectors of industry, suppliers need to be encouraged or cajoled into moving towards cleaner, more sustainable business practices, and banks can play a major role in driving this transition through the provision of tailored sustainable trade financing.

While geopolitical challenges will continue to shake up trade in the near term, expanding access to financing offers a pathway to ensuring opportunities for growth are equally spread out to companies of all sizes. The challenge for us in the financial industry is not just geopolitical or technological change but how we can adapt and respond to these shifts and provide clients with alternate flows, so that a more equitable and sustainable path to economic development can be realised.