The bank payments obligation (BPO) will be more beneficial to Asian corporates than to other markets, according to a senior trade finance banker.
As world trade continues to grow much faster in Asia than in the rest of the world, the BPO is seen as a welcome alternative to letters of credit (LCs) on the continent, Ashutosh Kumar, managing director, transaction banking and global head of corporate cash and trade at Standard Chartered, tells GTR.
“The BPO is more relevant to Asia because if you look at risk mitigation tools, Asian corporates only have access to letters of credit. They have no credit insurance for example, or only from local players, so the BPO is their first alternative,” he says.
He adds that despite doubts about whether a BPO transaction will be cheaper than an LC, its financial benefits along the supply chain are undeniable. “LCs are very inefficient, and the whole process of getting documentation approved between different parties takes six to seven days, even when shipping only takes one day. Here the financial supply chain is very inefficient compared to the physical supply chain. What companies will gain in terms of efficiency and timeliness gives the BPO more value than LCs.”
However, Kumar recognises that the solution is still in its early stages, and that even after the adoption of International Chamber of Commerce (ICC) rules in April 2013, “only early adopters will go for it”, despite a strong desire from corporates to move towards open account transactions.
He goes on to say that more and more of the bank’s clients tend to ask for a more holistic discussion about supply chain finance, not only about trade. “For example if they want to start an SCF programme with 20 of their 50 suppliers, they also want to include cash management solutions for the 30 others in the discussion. The convergence between cash and trade is becoming very real.”
According to Kumar, companies also require multi-currency deals to be more streamlined and efficient.
Talking about the trade finance market in general, he points out that pricing has been flat to down in the past year; an indication that there is enough supply from banks. He adds: “There is however the question of how this capacity will play out in the market if world trade growth accelerates after a few years of slowdown. Would banks have the capacity to handle trade finance demand if trade grew faster, especially with Basel III requirements?”
Kumar believes the recent changes announced by the Basel committee, which has made the liquidity coverage ratio (LCR) more flexible for banks, are welcome, but that more needs to be done to ensure trade finance is not penalised. However, he is confident that there will be more and more steps in the right direction as regulators become increasingly aware of the particularities of the asset class.