The growth of intra-regional trade and supply chains across Asia has prompted interest in electronic solutions. But there are still some major hurdles to achieving any widespread movement away from the use of paper-based originals. Liz Salecka reports.
While Asia, led by China, continues to grow its global trade business, volumes of intra-regional trade have continued to increase apace.
In 2009 to 2011, intra-regional trade accounted for 53% of all Asia trade and has remained stable at this level, indicating that trade among Asian countries now outweighs their overall business activity with the rest of the world.
“Growth in intra-regional trade is a continuing trend in Asia. SMEs are growing in this part of the world, and this is resulting in an increase in supply chains within Asia,” says Ashutosh Kumar, global head of corporate cash and trade banking, transaction banking at Standard Chartered. “The middle classes are also growing, and as people become more affluent, this is driving consumption of a range of goods from food to automobiles.”
Similarly, Parvaiz Dalal, head of Asean structured trade, treasury and trade solutions at Citi, attributes the expansion in trade flows to a number of factors including the growth experienced in domestic Asian economies. “There is also an increased focus by countries within Asia to buy and sell goods from each other to achieve a reduction in the cost of goods sourced (COGS),” he says.
Intra-regional trade flows have also been boosted by the fact that many companies, based in larger Asian trading economies, are now opening offices in regional hubs to support their trade activities.
For example, some companies are now manufacturing in one country, such as China, and then dispatching goods to sales offices in other Asian economies, such as Singapore or Hong Kong, from where goods are then sold into other Asian markets. “They are doing this to become more efficient and have servicing hubs which are closer to the countries they trade into,” says Dalal.
Slow supply chains
However, in spite of this movement to improve the efficiency of trade flows across Asia, the speed with which trade transactions are executed is still being hampered by a continued reliance on original paper-based trade documentation.
“The speed of supply chain flows is still a challenge – and has become even more important recently as companies have been underestimating the flows involved,” says Kumar.
“The letter of credit process is the most complicated, and the use of paper-based letters of credit leads to the biggest delays in intra-regional trade,” adds Arthur Vonchek, CEO of Bolero. “Bills of lading also tend to be used in all trade transactions – even if they are on open account.”
However, electronic trade documentation solutions are now attracting greater interest and consideration in Asia – particularly among corporates and banks in larger trading economies such as Hong Kong and Singapore. While solutions such as the Bank Payments Obligation (BPO), an electronic instrument which performs a similar function to a letter of credit, and the e-bill of lading are still in their early days, the electronic presentation of letter of credit data is already happening.
Bolero claims it is seeing increased take-up of its e-presentation services, which allow the electronic transmission of all trade documents required under a letter of credit agreement, including the bill of lading, between all the parties involved in a trade transaction.
“Large Asian exporters are driving these programmes but banks and their customers – the importers – are also keen to adopt e-presentation services. We are also seeing a multiplier effect whereby the importers themselves then seek to use e-presentation services with their own customers,” says Vonchek.
Since the start of the year, 15 large importers have signed up to use the Bolero platform so that they can receive documents electronically, including the bill of lading. Moreover, Bolero has recently signed agreements with a number of banks in Asia, including China CITIC Bank, which processed its first end-to-end e-presentation in collaboration with BHP Billiton, ANZ (China) and Sichuan Emei Ferroalloy Import & Export Co in January this year. This represented a major innovation in electronic trade documentation transmission because it included an e-bill of lading – something which has proved difficult to achieve in the Chinese financial sector to date.
“Bolero’s e-presentation services enable the importer to collect goods earlier and the exporter to collect cash earlier,” adds Vonchek. “At the same time, they also remove the risk of documents being lost in transit as well as improving the quality of documents by reducing the possibility of discrepancies.”
A role for e-bills of lading
Although the e-bill of lading is still a relatively new solution, a huge amount of importance is now being placed on the role it can play in intra-regional Asian trade – particularly to guard against the possibility of goods arriving at their destination before the required paperwork.
“This is a key trade document, and there is a lot of interest from companies in using an electronic version of this document, providing it is legally accepted,” says Andre Casterman, head of corporate and supply chain markets at Swift, pointing out that Swift is working with vendors such as Electronic Shipping Solutions (EES) and INTTRA, to see if e-bill of lading solutions can take advantage of Swift communication standards. However, he also notes: “Ensuring and proving the legality of electronically-transmitted e-bills of lading, particularly in Asia where original trade documents are required by authorities, is still the biggest issue.”
The fact that different jurisdictions operate different laws governing the acceptability of electronically-transmitted trade documents represents one of the biggest challenges to the widespread take-up of solutions such as the e-bill of lading within Asia.
“In some countries the law itself is not clear when it comes to electronic documentation – and in some countries laws governing electronic documents do not even exist yet,” says Standard Chartered’s Kumar. “This is an evolving process on which shipping companies, importers and exporters are working together with port authorities. However, there are multiple port authorities across Asia and, even within individual countries, there are multiple port authorities.” He adds that there is also still a big question mark over whether, in the event of a claim under an e-bill of lading, local law courts would accept it. “This is something that is still the subject of work in progress,” he says, noting that physical bills of lading offer a time-tested solution.
Meanwhile Citi’s Dalal points out that the financial crisis of 2008 has also made authorities in a number of countries clamp down more – and this has restricted the use of electronic documents. “There are cross-border regulatory constraints in certain countries, where physical, original documents are required as proof of shipment. The situation has been changing over the last three to four years, but a major shift is still required in certain Asian countries,” he says.
He notes that in Bangladesh, for example, original paper documents are still required as proof of shipment and, in India, exchange control regulations require submission of an exchange control copy of bill of entry as a proof of goods being imported into the country. “Major centres and cities such as Singapore and Hong Kong are fine with this, but in smaller cities and ports the level of technological readiness and commercial awareness is not yet there,” he concludes.
Opportunities to transmit documents electronically between third parties involved in trade transactions are also likely to be hindered by the major investment in systems and technology this requires.
“A buyer and a seller can send information securely electronically, but when it comes to third parties such as insurance companies and shipping companies, the situation becomes more complex,” says Dalal, pointing out that achieving this level of integration requires a major investment by third-party service providers.
The BPO in intra-regional trade
While the use of paper-based trade documentation continues to present its challenges for exporters and importers involved in intra-regional Asian trade, it is also proving a headache for banks.
As Swift’s Casterman points out: “The letter of credit is an instrument which is slowing down commerce and creating inefficiencies. More and more banks now want to use an electronic version of this document, and be presented with data – instead of paper.”
For these reasons, Swift believes that the BPO, an instrument which is transmitted electronically between two banks to guarantee payments in trade transactions, has a particularly strong role to play in the Asian market. The instrument, for which industry-standardised rules were recently published, is already being used to guarantee trade transactions by banks in the region such as Bank of China and BTMU, which participated in the first live bank payment obligation (BPO) transaction in 2010.
“Many large Asian banks such as Bank of China, BTMU and Standard Chartered have taken a strategic position on the BPO and have reached a good state of readiness for BPO transactions,” says Casterman. “They are now helping other banks in the region to connect to each other and use the BPO for intra-regional trade transactions.”
Casterman points out that the BPO will remove inefficiencies and speed up trade finance transactions, thereby enabling smaller suppliers to gain faster access to cash.
Once banks in smaller Asian economies support the BPO, this will also help them to offer facilities to their SME customers, which are increasingly looking for pre-shipment finance. Here, he explains that SME suppliers cannot gain access to pre-shipment finance from their buyers’ banks – and that their own local banks need to do an assessment of their performance before making it available.
“This is where there really needs to be improved connectivity between a buyer’s bank and a supplier’s bank,” he says. “A supplier’s bank can use the BPO issued by a buyer’s bank as collateral when offering finance to a supplier. It can structure a lot of the risk on the buyer’s bank, and also do a performance risk assessment of the SME customer – and this decreases the risk involved.”
However, in spite of this, there are some concerns that the BPO may remain the preserve of major Asian banks handling large volumes of trade transactions.
Dalal at Citi points out that a large number of local banks across Asia do not necessarily have the technological expertise and linkages to world trade required for BPO adoption, and it may not be a priority for them. “The amount of trade involved is also a consideration for a BPO to take place,” he says, adding that in a BPO two banks must be capable of undertaking the transaction and that, in some instances, one bank may not have secured the required level of readiness.
“The BPO is still in its early days,” adds Bolero’s Vonchek, pointing out that widespread take-up and use of the instrument will take time. “Players in the trade finance space still need to learn how to the use the BPO and what technology they need to put in place – as well as decide where they are going to use it.”
Vonchek also raises questions over the level of interest smaller banks may have in BPO transactions: “When you look at the banks supporting the BPO, it is the larger players. There still needs to be much greater awareness of, and support from, smaller banks.”
However, here Casterman points out that some local banks in Thailand and Malaysia have now joined the BPO group including Siam Commercial Bank and Maybank. “Smaller banks can be much more agile when it comes to the adoption of new solutions, such as the BPO, because they are not as affected as much by internal processes and can get things done quickly,” he says.
Siam recently became the first bank in the Asean region to offer a BPO service, and conducted a BPO for a payment between PTT Polymer Marketing and its trade partner in China in December last year.
“The bank is determined to initiate innovative financial solutions to fully satisfy its clients’ demands,” says Vichit Suraphongchai, chairman of the executive committee at SiaM Commercial Bank. “This internationally-recognised financial innovation will provide added convenience and facilitate payments for importers and exporters, giving them increased confidence to trade with each other because the bank serves as an intermediary to check trade and payment information.”
“This is a new product that banks need to develop an understanding of but this should not be difficult given that it fulfils a similar role to a letter of credit, although the mechanics of it are quite different,” adds Casterman.
However, he also notes that it is not the technical aspects of the BPO that will provide banks with the biggest task but the legal aspects of their arrangements with corporate clients and the commercial aspects of the BPO.
The growth of intra-regional Asian trade and extension of supply chains across the region is also generating demand for more and new types of supply chain financing.
“Supply chain finance is growing at a good pace in the Asian market – both for intra-regional trade and domestically,” says Standard Chartered’s Kumar. “It is being used to support suppliers as well distributors across the region.”
Today, large buyers in Asia’s larger trading economies in particular are much more aware of the need to support their growing base of suppliers in smaller Asian economies.
“Buyers are helping them to secure financing to assist them with their working capital flows, and this is viewed as critical to ensuring the flow of goods and the competitiveness of the buyer,” says Citi’s Dalal, pointing out that many Asian companies now recognise how dependent they are on their suppliers. “We have seen a few examples of larger buyers in large economies supporting smaller suppliers involved in, for example, garment manufacturing in countries such as Bangladesh and Sri Lanka.” He adds that many large Asian companies also now offer their strategic suppliers the option of advanced or early payment to ensure they have adequate access to working capital.
In line with global trends, there is also growing movement towards the provision of inventory finance and warehouse finance, where the finance offered is secured on the goods being stored.
“There is a lot of demand for inventory financing for goods which are held but not needed immediately,” explains Kumar. “This tends to be offered by the larger Asian banks which use the inventory as collateral to offer financing equivalent to typically 80% of the value of those goods.”
In certain jurisdictions, there are also opportunities to execute security-backed transactions, although this varies considerably from one jurisdiction to another. “Where the legal infrastructure is very efficient, and banks can perfect a security interest in the underlying goods, they are comfortable offering warehouse finance for sizeable deals,” says Dalal, noting that larger Asian banks do offer solutions in which the security interest is perfected for larger deals. “However, local banks also do collateralised lending where the security is not perfected, and in this scenario it is more of a bank loan, backed by the goods as security.”