New guidance from the Global Supply Chain Finance Forum (GSCFF) on receivables discounting is expected to go some way towards addressing the lack of consistency and clarity in the world of supply chain finance.
Titled Market Practices in Supply Chain Finance: Receivables Discounting Technique, the document covers common market practices in risk management, documentation and operational handling for receivables discounting transactions.
“Our hope is that this guidance will lead to an industry-wide, uniform adoption of the receivable discounting technique,” says Christian Hausherr, European product head of supply chain finance at Deutsche Bank and chair of the Global Supply Chain Finance Forum. “When all parties use similar techniques and terminology, it makes for a more streamlined and efficient process.”
Receivables discounting is a form of supply chain finance (SCF), in which sellers of goods and services sell individual or multiple receivables represented by outstanding invoices to a finance provider at a discount. Although SCF is one of the fastest growing trade products, financial institutions often don’t use similar terminology or accounting techniques, potentially leading to confusion among clients and regulators.
The SCF industry has had a torrid time of late, with the collapse of UK construction firm Carillion in early 2018 dragging it into the headlines as concerns grew among industry bodies and ratings agencies that failing companies were able to misuse these financing programmes to prop up balance sheets and potentially treat suppliers unfairly.
In light of this, the industry has been working to ensure the benefits of SCF as a sustainable means of managing working capital are fully understood. Most recently, the International Trade & Forfaiting Association (ITFA) released a set of guidelines to help those involved in supply chain finance assess their financing programmes and recognise instances where they are being misused – and when they should be reclassified as debt.
The GSCFF, of which ITFA is a member along with the International Chamber of Commerce (ICC), the Bankers Association for Finance and Trade (Baft), the Euro Banking Association (EBA) and Factors Chain International (FCI), now aims to build upon that work by streamlining techniques and terminology to ensure that all parties involved have a full understanding of the product.
In a conversation with GTR, Hausherr joined Stacey Facter, senior vice-president for trade products at Baft, and Farhad Subjally, head of trade products for Europe and Americas at Standard Chartered Bank and working group member, to explain the most important aspects of the guidance document, and outline what the next steps will be for the SCF industry.
GTR: What does the guidance document cover?
Hausherr: The supply chain finance definitions published in 2016 by the GSCFF cover a broad scope of eight supply chain finance techniques. This guidance document now drills further down into one particular technique, receivables discounting, and explains industry practice in more detail. In that context, it can be seen as an addendum or a complimentary document to the supply chain finance definitions, and both papers should be seen in context with each other.
GTR: Why was receivables discounting chosen?
Subjally: The working group chose receivables discounting for two reasons. First, it’s one of the fastest growing supply chain finance techniques, and the second is that it is also one of the more complex and more challenging products.
While it does not have an accounting challenge, it certainly has to a large extent a credit challenge – and there are some credit issues embedded in there. Because it is fast-growing and because there are no established standards, the working group felt that putting together a guidance document would benefit the whole industry.
There are, however, other variations to the technique that we did not address, because we thought they were niche requirements or outside of scope, for example in the case of syndicated receivables discounting.
GTR: What are the key takeaways?
Subjally: These are a set of standardised practices which should help banks internally to structure and run such programmes. This set of definitions and structures can help align all parties so that when a bank talks about a receivables discounting programme everyone from sellers to buyers, insurers and underwriters has a common understanding of the structure.
Facter: The key issue that you need to be thinking about when you put these programmes together is what is going to make them more successful or less successful? Are you trying to achieve one thing, like true sale? What are you doing in terms of the regulatory requirements? Are you looking at recourse, or no recourse? All of these are things to think about as you develop a programme and make sure that when you are developing it you are thinking of all of the nuances as well as operational issues.
GTR: Who is this guidance aimed at?
Subjally: With this paper we have begun to create common terminology among practitioners, not just within the banking industry but also with seller clients and buyers. To that I will also add the insurance market. When they get enquiries from banks or clients the aim is that they are all looking at a common set of definitions and common standards.
Facter: The investor community is also a key focus. The secondary market is very, very important.
GTR: Who was consulted when putting it together?
Facter: Initially it was drafted by Baft’s Supply Chain Finance Committee and then shared with all of the members of the associations comprising the GSCFF – namely Baft, the ICC, EBA, ITFA and FCI. We had commentary over a period of time and incorporated a lot of the information that we received. One the most important things that we did during that period of time was to make sure it was a global document and it was not just focused on one particular market like the US.
Hausherr: In this particular initiative for the receivables discounting paper, there were over 30 participants from the three global regions, which includes banks, industry organisations and fintechs. I would say it is a pretty broad view on the industry and it is a fair representation of business practice.
GTR: To what extent can this document help address concerns from regulators and ratings agencies around supply chain finance programmes?
Facter: It’s important to bear in mind that the challenges around the approaches to accounting for supply chain finance products are more relevant for the payables finance technique rather than for receivables discounting.
On the payables finance front, no matter what we do with respect to the accounting treatment, clearly the intention is to at least lay out what the fabric of a payables finance programme looks like if you are looking to achieve a certain type of accounting approach.
We can only say, ‘this is what we understand to be the approach, and if you adhere to it, then you will be within the confines of what you are looking for in terms of the accounting treatment’. Clearly, we will reiterate that any institution doing any of these programmes with their customers will need to obtain accounting guidance from their own internal or external accountants. It is a very delicate matter, and we just want to make sure we address the negative press that the programmes have received, because while there are very few bad apples, we want to refocus on the good apples, if you will.
GTR: What are the next steps?
Hausherr: We are currently working on another paper on payables finance which will be structured similarly to the guidance on receivables discounting. There will be some other highlights, particularly on the question of accounting, because that is the real hot topic in the context of payables finance.
Don’t expect too much, because accounting is obviously owned by accountants and not by banks, so we cannot give any guidance here, but we have had intense and interesting discussions with accountants and other interested parties and still expect to provide information that will be helpful to the reader.