Asia is often portrayed as a land of milk and honey, where liquidity and capital flow freely, and high levels of economic growth continue to attract foreign investors. But not all countries in Asia it seems are reaping the benefits of this exuberant vision. Outside of the two largest economies in Asia, India and China, and more established financial markets such as Singapore and Hong Kong, countries like Bangladesh, Cambodia and Tajikistan may hold a lot of promise in terms of their future growth and investment potential, but companies in these frontier markets do not have the same level of access to capital as companies in larger, creditworthy Asian countries.
This what the Asian Development Bank refers to as "the two faces of Asia", which it is trying to address through its Supply Chain Finance Program . "Many small companies currently face lags of 30 to 180 days between the time they ship goods and when payments are received, leaving them short of cash flow that forces some to slow production or delay the processing of other contracts," notes Philip Erquiaga, director general of ADB's Private Sector Operations Department. "This program will unlock financial resources caught in the supply chain and thereby improve companies' access to affordable working capital that helps support jobs and incomes."
According to the ADB, the challenge faced by SMEs in Asia has been exacerbated by the continued global economic downturn with buyers continuing to apply pressure on suppliers to extend payment terms. As Eugene Buckley, vice president and general manager, Asia Pacific for supply chain platform provider, PrimeRevenue explains, longer payment terms can blow back up the supply chain in the form of suppliers' inability to fulfill orders. It can also make that decision to source goods from a seemingly low-cost location unattractive as suppliers may not have access to affordable sources of capital.
The ADB's SCFP will assume nonbank commercial risk for both cross-border and domestic transactions within a supply chain and provide affordable finance to many small-and-medium-sized enterprises, many of whom may not have traditionally been considered bankable. It is particularly focused on frontier markets in Asia (Vietnam, Cambodia, Bangladesh, Pakistan) where banks are less inclined to extend credit to companies. "Banks have finite amounts of capital and are focused on core markets and clients," notes Steven Beck, head of Trade Finance, Private Sector Operations Department, ADB. "Typically, that is not developing countries outside of the BRICs, and it is not going to be SMEs."
There are a lot of corporates in Asia that are not investment grade, which are being overlooked by banks, and even if they can obtain access to bank financing, often it is at much higher rates. "In China the cost of bank finance is anywhere up to 25%, and the government is clamping down on lending by the banks," says Buckley. Other forms of financing also typically require companies to put up some form of collateral, whereas an SCF program is linked to sales and can provide an additional and cheaper source of funding that leverages the creditworthiness of a large multinational buyer.
There is also a growing fear among Asian companies that access to financing will be substantially curtailed as a result of Basel III. Standard Chartered Bank estimates that Basel III implementation over the next five years will result in a $340 billion shortfall in bank lending for corporates in Asia ex-Japan. It anticipates that the Asian corporate bond market will pick up some of that slack, but the anticipation is that companies will also turn to alternatives such as SCF in order to access to much-needed working capital.
Today, however, SCF is still a relatively little-known concept amongst Asian companies. Most of the SCF programs already in place in the region have been instituted by large Western multinationals that have experience of such programs in their home markets and are now looking to extend them to Asia where the bulk of their manufacturing is now located. According to recent research published by working capital specialists, Demica , major international banks surveyed identified China and India as being among the top three areas of the world with the greatest SCF market potential in future.
Yet, the same report highlighted the complexities (local legislation, multi-regime compliance and marketing the advantages to suppliers) for banks in rolling out cross-border SCF programs. These complexities are multiplied when it comes to markets like China and India. In China, for example, suppliers are required to provide copies of underlying invoices before they can transact, and in India, stamp duties are levied on receivables purchases , so SCF programs in these markets need to be structured differently.
Asian-based corporate treasurers also highlight the need for partner banks to walk the walk and not just talk the talk. They want partner banks in SCF programs to have a thorough understanding of local markets and the commitment and the balance sheet to provide financing when the supplier actually needs it. They also want to work with partners that can clearly explain the benefits of such programs to suppliers who may not understand what SCF is and who may think it is to good to be true.
There are also significant social and cultural barriers to overcome in Asia before SCF gains wider acceptance. "Asians are still extremely cautious," says Buckley of PrimeRevenue, "which is why there are still a lot of traditional approaches to financing. The thinking is 'If it's not broke then why fix it?'"
But in those markets where there is a lot more competition, Buckley says corporates have to look at the best possible financing structures to keep pace with the competition, and increasingly, those financing structures include SCF. "SCF is more favorable then a direct [bank] loan," remarked one Asian corporate treasurer. "In short, SCF is a win-win for the bank, the supplier and the customer but it depends on your composition of suppliers. Some of our suppliers are better rated than we are and don't need funding."
More often than not SCF programs are buyer-initiated, which means financing is only extended to key strategic suppliers based on the length of their relationship with the buyer and the quality of the goods they provide. It is also not a quick fix for those SMEs or suppliers that have more immediate financing needs as a typical SCF program can take up to 12 months to implement.
Interest in SCF may be growing in Asia, but it is by no means a panacea for the wider financing challenges faced by SMEs in the region, and banks and platform providers should not approach it with a one- size-fits-all mentality. They will have to significantly customize their offerings to suit the specificities of local market conditions and regulations, and the varying levels of cultural acceptance across different markets of alternative forms of financing.