The following interview first appeared in issue 2 of Supply Chain on SWIFT which you can download from swiftcommunity.net.
Anecdotally, there are a lot of statements being made about the lack of trade financing credit. Honestly, I think the jury's still out on that one. If you talk to our peers, we tend to share the view that there is not a lack of trade credit in general. Of course there will be certain segments of the market that do experience a shortage of credit, such as SMEs, but that does not apply to the broader picture. We at Standard Chartered see no material change in our total credit limits cross-border on a global basis, but we do see a change in the utilisation of those limits. That has gone down significantly though limits have been consistent.
The lack of utilisation, I can only conclude, is due to the lack of demand at the corporate end. It is this lack of economic demand rather than the lack of credit that is the primary cause of business downturn. Having said that, I would acknowledge that certain segments have suffered from a contraction of limits, notably the SMEs, as I mentioned. Exporters have also suffered from their dependence on the credit insurance market, which is very concentrated. Globally three underwriters had captured 75% of the cross-border credit insurance market and all three have been negatively impacted.
That said, looking at the export trends in recent months, it does not appear that America is cancelling its Christmas this year.
I would say that, in the last decade or so, the demand for information has been increasing and every time we see a crisis - and the present crisis is no different in that regard - the demand for information sees a big step change. To a certain extent, one could say that the banking business depends on information arbitrage. An exporter believes that an importer isn't creditworthy, based on the information they have. The bank believes it is creditworthy, based on the information the bank has. Because of that difference in assessment, we are able to provide credit cover. In this crisis, at least in its early stages, we realised there there was a big information vacuum. People simply did not know what they did not know. Those of us who have been in the business a long time, on an average day, know what we know and we probably know what we do not know. Last year a lot people were not aware of what they did not know. Because of that, the exporters of the world increased their demand for credit cover, but because the credit insurance companies were coming up against the same problem of lack of information, they were reluctant to provide that cover.
One can look at risk management from different perspectives. One approach for a corporate is to outsource counterparty risk to a bank or a credit insurance company. Then there is the question of operational risk management and information risk management. At a basic level, TSU provides a way of making information much more transparent and much more structured between importers and exporters as well as for the banks, making it easier for them to provide credit risk cover and financing.
It's certainly on the right track. But if you think about it, it took a long time for SWIFT to replace the telex machine; many years, in fact. It was only four or five years ago that Bangladesh abandoned the telex machine and moved over to SWIFT. It would be foolish to expect that in one or two years, there would be mass adoption of TSU. TSU is launching a new way to conduct open account business. At the same time, there are other alternatives that have been around for a while, including factoring. We should not be too parochial about the solutions we are offering.
|Supply chain on SWIFT|
This interview first appeared in issue 2 of Supply Chain on SWIFT, a regular magazine from SWIFT that - through interviews with customers and partners as well as news items about SWIFT’s products - aims to demonstrate the value of SWIFT to the financial supply chain. You can download copies as well as debate the issues with fellow readers in the Supply Chain on SWIFT community of swiftcommuniy.net.