Three-quarters of trade finance lenders believe demand for payables finance programmes will remain stable or increase despite the introduction of divisive accounting disclosure rules, research has found.
Rules introduced in the US from late last year require corporate buyers to disclose details of their supply chain finance (SCF) programmes in their financial statements, and similar standards are due to take effect in January.
During industry consultations on the reforms, industry bodies had raised concerns that the requirements could prove difficult in practice and discourage use of payables finance – whereby buyers can use a financial intermediary to extend their own payment terms while offering earlier reimbursement to their suppliers.
But a survey of nearly 200 industry insiders carried out by SCF platform Demica finds that only 26% expect the rules to hurt demand for payables finance products, with 53% anticipating no change and 21% believing uptake will rise.
Just 8% say the reforms will change the nature of the payables finance products they offer, and 5% cite the rules as a major challenge to their business.
Demica chief executive Matt Wreford says it will take time to assess whether the rules are affecting uptake of SCF, but suggests the potential impact may have been overstated within the industry.
“Like another topic du jour of a few years ago, blockchain innovation projects, I suspect we will see it pass with the same level of enduring impact,” he says.
“Our view is that increased transparency is a positive for the market generally and so we side more with the 21% of participants forecasting increased demand.”
The reforms were initially introduced after concerns from ratings agency Moody’s and major accounting firms that SCF programmes could be misused to downplay the level of debt corporate buyers take on.
The issue made headlines when UK-based construction firm Carillion collapsed in early 2018, owing around half a billion pounds to banks that was not disclosed on its balance sheet.
And in January, Brazilian retail giant Americanas revealed it owed billions of dollars to lenders under an SCF programme that had not been reflected in its financial statements.
Martin Lawrence, a director of Australian investment research firm Ownership Matters, said last year that companies misusing programmes to disguise debt would likely suffer once the reforms took effect, but that legitimate commercial operators would see little impact.
But industry bodies, including the Bankers Association for Finance and Trade (Baft) and the International Trade and Forfaiting Association (ITFA), suggested the proposals could prove problematic in practice.
In response to a consultation paper from the International Accounting Standards Board, which is responsible for drafting the international disclosure rules, Baft said buyers could struggle to provide sufficient information because they are not party to terms agreed between a supplier and a financing provider.
ITFA added that requiring granular detail to be disclosed risks imposing “a disproportionate burden on reporting entities”.
Yet the Demica survey finds the growth of the payables finance market is not expected to suffer as a result of the reforms.
Annual volumes in Asia, Africa, Europe and the Americas grew from US$971bn in 2019 to over US$1.3tn the following year, and growth “shows little sign of slowing down”.
Lenders have long suggested inflation and rising interest rates will accelerate demand for SCF more widely.
Citi said in a January report that the rising cost of finance means suppliers are incentivised to lean on the credit rating of their larger corporate buyers to access cheaper liquidity.
“This increases suppliers’ resilience, shoring up the physical supply chain,” it said.
MUFG said in its outlook for 2023 that inflation “should incentivise suppliers to shorten payment cycles by liquidating receivables as the value of money erodes”.
Demica’s Wreford says that against this economic backdrop, SCF offers a “materially lower cost of funds than traditional corporate debt for everyone other than large investment grade firms”.
“The stage is set for banks to report material increases in SCF revenue,” he says. “With that context it is no surprise that this year’s report shows nearly 75% of respondents expect their bank’s SCF book to grow over the next 12 months and less than 7% expect it to shrink.”
Elsewhere, the survey found that appetite for integrating ESG standards into SCF offerings remains muted.
77% of professionals surveyed said their bank is not actively using ESG ratings services when structuring transactions, and only around half said they were focusing on offering favourable rates based on ESG scoring.