Every year GTR gathers some of the most influential names in Asian trade finance to discuss the challenges and opportunities the market faces. This year, the meeting was held virtually ahead of GTR Asia 2020 and, unsurprisingly, Covid-19 and its impact on trade featured strongly in the conversation. However, the pandemic is not the industry’s only focus. Our roundtable participants also discussed what needs to be done to close the trade finance gap and the role trade can play in driving greater sustainability within supply chains – and gave their views on the perennial hot topic of trade digitisation.
- Atul Jain, managing director, head of trade finance and lending, Asia Pacific, Deutsche Bank
- Azim Walli, managing director and head of product, transaction banking Asia, MUFG
- Claire Thompson, executive vice-president, enterprise partnerships, Mastercard
- Sriram Muthukrishnan, group head of trade product management, global transaction services, DBS
- Lisa McAuley, chief executive officer, Global Trade Professionals Alliance (GTPA)
- Peter Jameson, head of Asia Pacific trade and supply chain finance, global transaction services, Bank of America
- Kanika Thakur, managing director, head of trade, Asia Pacific, Citi
- Eleanor Wragg, senior reporter, Global Trade Review (GTR) (host)
Times are tough for trade, but there are pockets of growth
This year has arguably been one of the most difficult in living memory for trade. Already buffeted by geopolitical tensions and macroeconomic shifts, supply chains across Asia have had to contend with the new challenges brought about by Covid-19, and for many companies, the situation is alarming.
“The impact of the pandemic has been immense,” said Sriram Muthukrishnan, DBS’s group head of trade product management, global transaction services. “Some companies in certain industries are having to figure out how to make it the next quarter, it is as dire as that.”
“The start of this decade has definitely turned out to be a far cry from the roaring twenties that many of us had been hoping for,” added Atul Jain, managing director, head of trade finance and lending, Asia Pacific, at Deutsche Bank. “Trade flow growth will remain highly unfavourable in the short-term: commodity price declines, record insolvencies, and high-profile fraud cases have all coalesced alongside this pandemic into a perfect storm.”
However, not all sectors have been equally impacted. “We’ve seen slowdowns in certain industries, and an uptick in other industries,” said Azim Walli, MUFG’s managing director and head of product, transaction banking Asia. “Commodities and petrochemicals have obviously slowed down, but in IT, electronics, and cloud computing, we have seen a remarkable uptick over the last 12 months.”
As Asian supply chains shift, advisory is back in fashion
Already a growing trend in the wake of the US-China trade war, the diversification of manufacturing supply chains out of China to reduce businesses’ reliance on the Asian giant has been further accelerated by the pandemic.
Figuring out how to improve supply chain competitiveness in this constrained environment has become of vital importance, and banks have a key role to play, said Kanika Thakur, managing director, head of trade, Asia Pacific at Citi. “Advisory is back in fashion, because people want to understand what the right thing is to do, and what alternate solutions they should be looking at. As a business, trade has managed to de-commoditise itself in this period,” she said.
“It is time for both banks and large corporates to think differently,” added Muthukrishnan. “In the past, supply chain resilience measures have been opportunistic, or driven simply by working capital management needs.
We have to turn this conversation on its head. It is not about finding the time or the capacity in the future; it has become an imperative. If you are really serious about strengthening the resilience and dexterity of your supply chain and survive and thrive beyond this crisis, you have to take proactive, positive action now.”
The trade finance gap remains as wide as ever, and it’s time to rethink how the industry finances the ‘long tail’
For several years, there has been a severe shortage of trade finance capacity to service the needs of exporters in Asia, with the region accounting for a sizable proportion of the global trade finance gap, which remains at US$1.5tn, according to the Asian Development Bank (ADB). Amid the fallout from Covid-19, this gap is likely to grow even wider, which means working out how to get the money into the hands of the smaller firms that need it most has become of vital importance.
“We really have to change the way we look at financing SME trade,” said Muthukrishnan. “We have got to stop asking our SME clients to add more collateral, because they are already stretched. We need to think about supply chains and ecosystems differently, and we’ve got to use data as the new collateral to underpin financing decisions.”
“We can use trading history data in a smart way to go deeper into the procurement cycle, rather than financing just the last leg of the cycle,” added Thakur. “We have had elevated dialogues with our clients to provide a resilient form of financing and support to their entire ecosystem, but that large corporate anchor client has to be committed to the process and have skin in the game.”
Trade digitalisation has gained traction, but digital islands are still a concern
As many in the trade ecosystem found themselves unable to move physical documents amid pandemic lockdowns, the need for digital solutions has become apparent, said Walli. “Covid has definitely highlighted the need to accelerate digitisation and technology offerings, to the point now where clients are requesting it much more actively than they have in the past.”
Asia is one of the most advanced regions in the world when it comes to trade digitalisation, but efforts have thus far been somewhat disjointed, resulting in siloed initiatives that can be complicated and costly to navigate.
“Many governments in Asia, including China and India have been working closely with many of us to create solutions that could be more digital, but a more seamless industrywide approach is definitely the need of the hour,” said Thakur.
“There is a danger of digital islands, and this won’t serve any purpose. At the end of the day, that will just take cost out of the economy as we all go off and develop our own things. So, coming together and having a common approach to this remains really critical,” added Peter Jameson, head of Asia Pacific trade and supply chain finance, global transaction services, at Bank of America.
But without greater efforts around standardisation and interoperability, concerns remain that ridding trade of paper once and for all will be an insurmountable task.
“We are not going to get anywhere with getting rid of paperwork if we don’t have a harmonised set of data standards that all countries agree to,” said Lisa McAuley, CEO of the Global Trade Professionals Alliance.
Regulators are supportive, but hurdles remain
“In many of the more technologically advanced geographies, the regulators have played a very proactive role coming up with programmes to support digitisation. There is serious government focus on creating platforms and systems,” said Thakur. “However, where we will need more support is in electronic signatures, data management, sharing standards, and reducing the number of checks and balances and points of control that the governments still need on paper today.”
“One major gap that needs to be addressed is around the use of data on sanctions screening, trade-based money laundering, and KYC. How do we get around privacy issues to share that information so that we can reduce turnaround time and respond to customers more quickly?” asked Walli. “These issues are only going to increase our costs.”
Unlike during the global financial crisis, however, there is the feeling that both regulators and the financial services industry are on the same side.
“If I look back at 2008, regulators, banks and other players were polarised, and that is never a good harbinger of progress,” said Jameson. “The difference this time is that banks and regulators are very much working together in consultation to solve problems. I’m very positive about that, because it is going to drive much better, consultative, industrywide conversations that will get somewhere in the end.”
Sustainability is taking centre stage, and banks are being called upon to help
“Sustainability has evolved from being a buzzword into something that is here to stay. This pandemic has probably helped all of us appreciate our connectedness to one another and to the environment,” said Jain. “Our clients, who want to be more robust with their ESG standards, are coming to us for help. And ultimately I don’t think it matters whether it is led by the bank or led by the client: what I can confidently say is that the positive intent to do the right thing exists on both sides.”
In an interesting twist, corporates are now increasingly requiring better ESG performance from their banks, as they seek to ensure that not only their physical supply chain but also their financial supply chain meets ever-tougher sustainability standards.
“This year, our clients have not only started to engage us more about sustainable financing, but increasingly about what we as banks are doing to ensure that the funding sources for that financing are derived from sustainable sources,” sais Jameson. “I certainly think that this is a thought process that has evolved and been accelerated as a result of Covid.”
The pandemic has exacerbated inequalities in trade, but also offers a chance to do things better
Unable to pivot to new activities and constrained by a lack of capital, small manufacturers across the region have been hard hit as global demand for the goods they produce has stalled.
“Small businesses have a singular focus at the moment, which is survival,” said Jain. “That means focusing on cash and liquidity above all else, producing only what they can sell, and doing so in the least costly manner. These are all tactical measures which leave them with even less bandwidth to think about innovation and growth.”
“A lot is being exposed by Covid,” added McAuley. “It is not just about trade. There is a lot of economic injustice, and you can’t separate the two right now. We have to do better to foster inclusivity for SMEs and for women and minority business owners. What we see here is the chance to reset and look at policy that can help SMEs in the future access value chain opportunities.”
There are already some indications that this reset is underway, said Claire Thompson, executive vice-president, enterprise partnerships, at Mastercard. “Large companies are coming to us and to the banks for support in helping the companies in their supply chain. This isn’t just their big suppliers, but it goes right down to the middle market and the SMEs.”
To provide creative solutions, the whole industry needs to work together
“As we think about the future, it is clear that we can’t go at tackling the issues alone because we each have our own particular area of focus,” said Jameson. “The only way of achieving this is by getting everyone together – the large banks and corporates, and partnering with those who can manage that risk by being closest to the various end users. That is where I think we need to go, otherwise I fear that there will always be a trade finance gap, because we all want to focus on our own clients.”
“As an industry, there has to be a partnership approach,” added Thakur. “Whether it is sharing data, or the larger networks that many of us are now investing into, this will give us more ability to be able to finance in a manner that is different from how we did it before. Governments and multilaterals also have a very large role to play in this environment.”