In recent years, Asia has emerged as the focal point of the global economy, with major developmental strides laying the ground for regional co-operation and increasing trade ties both within and outside of the continent. Although headlines thus far have been dominated by East Asia and ASEAN, South Asia now looks set to realise its potential as a key part of the Asian century, thanks to advances in regional integration and trade facilitation, writes Khushnama Davar, Managing Director, Head of Trade – India, Transaction Banking at Standard Chartered.
From the world’s least-integrated region…
Home to 1.75 billion people – around a quarter of the world’s population – South Asia, which comprises Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka, has experienced impressive average annual economic growth of 7.1% over the past decade, with exports almost doubling from US$157bn in 2006 to US$298bn in 2015. However, the relative lack of intra-regional trade, at just 5% of the total trade transacted compared to 25% for ASEAN and 35% in East Asia, has thus far held it back.
Historical political tensions and mistrust as well as limited co-operation in the management of shared natural resources have all played their part. What’s more, due to limited transport connectivity, onerous logistics and regulatory impediments, the World Bank estimates that it actually costs more to trade within South Asia than between South Asia and the world’s other regions. For Indian exporters, it is 20% cheaper to trade with Brazil, on the other side of the globe, than with neighbouring Pakistan. A major reason for this is the lack of efficient trade routes. Not all borders are open to trucks, which means trade from India to Pakistan often goes via Dubai rather than making the short crossing over land. And then there is the enormous quantity of paperwork involved. Complying with trade restrictions in South Asia takes an average of 30 days, compared to just 11 days in OECD countries.
…to one of its most rapidly integrating
But change is afoot. Cognisant of the enormous opportunities available on their doorsteps, many South Asian governments have begun to prioritise closer co-operation with their neighbours. For instance, India and Bangladesh have now resolved many of the issues marring their fractious relationship, amicably resolving their decades-old boundary dispute and signing multiple agreements enabling maritime cooperation and smoother movement of goods. The results are remarkable: from a modest US$1.8bn in 2004, bilateral trade between India and Bangladesh has since almost quadrupled, reaching US$6.6bn in 2014. The Confederation of Indian Industry (CII) projects that this figure
will hit US$10bn by 2018 if the two countries continue to resolve outstanding issues such as non-tariff barriers and infrastructure bottlenecks.
Economists predict that if South Asia’s energy-rich nations shared their power with their neighbours, the region could double its electricity transmission connectivity and trade by 2020. Steps are already being taken in this direction, with India and Bangladesh entering into partnerships in the energy and power sector, and hopes are high that others
will soon follow suit.
On the infrastructure front, projects underway around the region include road transportation development, rail infrastructure upgrades and the implementation of integrated check posts and simplified tariff structures to streamline the movement of goods and people across borders. And it’s not just intra-regional trade that will benefit: South Asia can also take advantage of the ambitious One Belt, One Road initiative being rolled out by China. Indeed, the China Pakistan Economic Corridor (CPEC) and the Bangladesh-China-India-Myanmar (BCIM) Economic Corridor have already been officially classified by the Chinese government as “closely related” to its Belt and Road initiative.
All of this progress is translating into real results, both for exporters and for the financial institutions which support them. Last year alone in Bangladesh saw Standard Chartered become the first bank to launch a comprehensive supply chain management solution, both on the supplier side and the distributor side. In another first for the country, Standard Chartered signed the first Islamic trade loan deal for Bangladesh’s largest Islamic financial institution, valued at US$150mn, and the bank also participated with the International Finance Corporation (IFC) in the country’s largest-ever risk participation agreement for critical commodities, worth US$350mn.
A new digital dawn
Arguably one of the most transformative developments in the South Asian trade space is the emergence of digital solutions. India has already done away with the paperwork required for imports and exports, opting instead for an online portal, which integrates with bank systems for real-time updates on payment of the underlying documents. The Reserve Bank of India has taken a progressive approach by setting up the National Payments Corporation of India (NPCI). In 2017, this umbrella organisation launched a Unified Payment Interface (UPI), a standardised, bank-agnostic system which enables account holders to pay or authorise debits using a virtual payment address, such as CompanyName@SCB.
As part of its new digital strategy, the Reserve Bank of India has also authorised three entities to set up Trade Receivables Discounting Systems (TReDS), which allow SMEs to access receivables financing at extremely competitive rates. Once they have supplied their goods, the SMEs upload their invoices, which are then bid for by the various financing institutions on the platform. This model stands as a best practice for others in the region to follow.
Throughout South Asia, companies are looking for ways to make intraregional trade faster, cheaper and better. The obvious focus is in the financial supply chain, and treasurers are calling on their banking partners to work with their procurement and commercial teams to extract financial and process efficiencies from their value chains. A key trend has been the growing openness to digitising certain processes in terms of their interaction with banks, whether that means the online issuance of letters of credit and guarantees or uploading invoices to a digital platform for discounting. Corporate banking clients are actively evaluating options like Bolero and Bank Payment Obligations (BPOs), as well as electronic bills of lading, which cut out completely the usual five to 10 day trade document transit time.
Standard Chartered has positioned itself to support these clients along their digital journey. Since 2001, when Standard Chartered first pioneered supply chain banking in India, the bank has continued to seek out different ways to support its clients and their ecosystems with customised solutions to manage their trade cycle amidst volatility in the global credit environment. In 2017, it became the first bank to launch a B2B/B2C collection solution, which rides on the UPI platform developed by NPCI. A new technology enabled solution, the Document Preparation Service, allows Standard Chartered’s corporate clients to rationalise their export processes, while the recent launch of paperless import payments and the bank’s registration with the TReDS platform in India enables South Asian businesses to better support their ecosystem.
Seeking the right solutions to cross borders
As progress in breaking down structural barriers to intra-regional trade gains pace, corporates around South Asia are taking greater advantage of opportunities in neighbouring countries. In 2014, for example, Ashok Leyland Ltd, India’s second-largest commercial vehicle manufacturer, won a tender for the supply of 2,200 buses to the Sri Lanka Transport Board. The deal, valued at US$80mn, had a five-year amortising repayment schedule, for which Ashok Leyland received structuring, credit limit and distribution support from Standard Chartered.
Supply chain finance in the region is now reaching unprecedented levels of maturity, as demonstrated by a recent deal carried out by Standard Chartered with one of the world’s largest global carbon black producers. The financing entailed structuring an umbrella receivable purchase facility on a limited recourse basis, bringing together sellers from seven different jurisdictions and covering more than 10 buyer jurisdictions in a single programme. For the client, the programme generated a balance sheet efficient source of liquidity tied up at group level yet made available to group constituents and aligned to their respective working capital needs, as an alternative to conventional borrowing tied up individually by the selling entities. Another illustrative case is that of an IT, consulting and outsourcing company with a global presence which needed to manage long-term five-year receivables. Here, Standard Chartered structured a bespoke solution for the purchase of unbilled receivables from the client by structuring a back-to-back credit insurance wrap to cover counterparty credit risk.
As South Asian companies start doing greater amounts of business with counterparties within the region, they need the right support from their banking partners to help them manage the risks involved. A global electronic and mobile phone manufacturer is currently piloting the first cross-border dealer finance programme with Standard Chartered, which will allow it to mitigate counterparty risks and increase sales in Nepal, Sri Lanka and Bangladesh as a result of the programme’s provision of liquidity support to distributors based in these countries. At the same time, a large pharmaceutical manufacturer has entered into a balance sheet-friendly structure provided by Standard Chartered which allows for the purchase of receivables from select buyers on a limited recourse basis. This solution has helped the firm to successfully mitigate credit risk on its receivables, obtain liquidity and improve its balance sheet position.
Encouraging steps are being taken toward more open and easier trade between countries and a modern, integrated South Asia is emerging. With over 150 years’ presence in the region’s major economies, Standard Chartered Bank is uniquely placed to serve the ambitions of companies in the region as they forge new paths and cross new borders, transforming South Asia into
the next Asian growth story.