UK Export Finance (UKEF) is set to launch a new initiative which will see it delegate its guarantees for small and medium-sized enterprises (SMEs) to five banks.
The Bank Delegation scheme, which is due to be launched in early July, will give the banks authority to issue UKEF guarantees for their customers.
The new guarantee model will change the way UKEF works with banks to deliver two products – the Bond Support Scheme (BSS) and Export Working Capital Scheme (EWCS) – by increasing the speed with which UK exporters receive decisions on applications.
“They [the banks] don’t have to do anything but tell us that they are issuing the guarantee,” said UKEF CEO Louis Taylor at the GTR UK Trade & Export Finance Conference 2017.
“They can underwrite and carry out due diligence without us redoing it, making it very rapid and very scalable as well. It gives us access to tens of thousands of SMEs out there and is very much about us working with the private sector,” he said.
GTR has learnt that UKEF is ironing out the final details and the lending parameters of the agreement and is currently in discussions with RBS, Barclays, HSBC, Santander and Lloyds Banking Group.
The guarantees will cover up to 80% of the amounts offered by the banks. The bond support scheme will help suppliers as the UKEF guarantee will reduce the requirement for them to tie up working capital as collateral against performance guarantees.
“When you win a contract, you have to place a huge amount of money as collateral against performance of that contract – it’s a real burden on the company,” said Taylor.
“For example, the offshore wind industry has an absurd bonding convention with vast amounts of money put up by suppliers, which really inhibits their ability to fill orders. What we can do is guarantee a bank that pays the money for a company and liberates working capital for them to operate their business whilst at the same time fulfilling the contract.”
While the guarantees will make more financing available for SMEs they will not change the risk assessment and profiling of companies by the bank.
“The guarantees will mean we can increase our lending to customers who are already profiled,” explains a source at one of the banks.
“Therefore, it will not increase access to SMEs who are deemed too risky, but will increase the amount we can lend to existing customers. It’s a good concept, but we will have to wait and see how well it works.”
Some conference attendees also commented that although the initiative was “very positive” it was “not enough”, suggesting that offering it via these banks only was limiting. Others suggested that it should be offered via other platforms.
Taylor stated during the conference that the ECA hopes to start with big banks but is “happy to work on that with challenger banks and alternative finance as well”.
The scheme is one part of a three-pronged approach by the UKEF to reach out to more UK exporters; through increased accessibility, scalability and flexibility.
While the Bank Delegation scheme aims to increase accessibility, the export credit agency plans to boost scalability through launching an online application platform that will allow bank partners to make submissions online. It is due to be rolled out at the same time as the Bank Delegation scheme.
“We are moving to a website that is transactional as well as informational. All the information that comes in will go straight through our systems and won’t need manual processing or manual intervention,” said Taylor.
“A lot of our products will become instantly more scalable once that system is up and running.”
Meanwhile, the ECA announced in November last year that it has increased pre-approved local currencies in which it can offer support from 10 to 40, enabling more overseas buyers of UK exports to pay in their own currency. Taylor said the move will increase flexibility and will focus on helping UK exporters realise opportunities along China’s One Belt One Road (OBOR) initiative.
“I was in Indonesia recently and the opportunities in infrastructure there, a country of 260 million people, are just enormous. We now have the capability of guaranteeing rupiah-based financing,” he said.
“These projects won’t generate dollar returns or dollar revenues to service dollar financing. So financing in rupiah is going to be huge comparative advantage and we are going to be able to replicate that in many other countries along the Chinese Belt and Road initiative.”
China’s OBOR initiative, which aims to better connect the European and Eurasian landmass with China, was first mooted in 2013. Consisting of a land and a maritime branch, OBOR will boost connectivity and co-operation between China and 60 countries, and aspires to achieve annual trade worth US$2.5tn between the countries located along OBOR within 10 years.