Time: October 19, 2012 Source: China Business Journal
Targeting at the Blue Sea Worth RMB 6.9 Trillion
Banks Launched Campaigns to Compete for Supply Chain Finance
As SMEs are the prime power for economy, the development predicament encountered by them is drawing increasing attention from the decision makers, and finance is becoming an important port for breakthrough.
In the middle of September, the State Council issued the “Eight Measures” for promoting the stable growth of foreign trade. Then, it was put on the agenda that financial institutions should provide more financing and guarantee services. The signals released by the “Eight Measures” mainly focusing on trade finance and supply chain indicate that the supply chain finance will play an important role in settling the financing difficulty of SMEs.
According to the forecast of Shenyin & Wanguo Securities at the company's official Weibo (microblog), the balance of supply chain financing loans in 2012 will reach RMB 6.9 trillion, increasing at a rate of about 20%. While the direct financing market at home becomes increasingly mature, it becomes gradually clear that large enterprises are on the path of financial disintermediation. Moreover, with the interest rates becoming market-oriented step by step, the conventional credit spread incomes of banks are confronted with unparalleled challenges.
Facing diversified financial demands of enterprises and changing market environment, banks are looking for blue sea beyond the conventional credit business, and the competition for supply chain finance which is in the ascendant now will become more and more furious.
Supply chain finance actuating the “demand lever”
SMEs account for more than 90% of the total number of Chinese enterprises, but the fund demands of this group have not been met in a long period. In this year, 600 famous private enterprises based in Hangzhou submitted a joint application to Zhejiang Provincial Government for help, which rang the alarm for financing risks of joint guarantee and mutual guarantee.
After the risk-shifting modes of pure guarantee-based financing encounter frustrations, supply chain financing which is characterized by self-liquidation may provide another solution for the financing difficulty of SMEs.
“Although the absolute demands decrease in the market now, relative demands still exist, and we still need more financial services”, said Xiao Feng, Vice President of Shenzhen One Touch Business Services Co., Ltd., to the reporter of China Business Journal.
Yet, with increasingly varied demands appearing in the SME market, the characteristics of supply chain financing make it become the “lever” actuating such demands.
Guangdong Xinzhongran International Travel Agency Co., Ltd. is one of the enterprises benefiting from the supply chain financing services. In this February, the company applied to Industrial Bank (IB) for pledge of accounts receivable, and the smooth handling of eight applications helped it to collect the accounts receivable of RMB 80 million, which alleviated the tense of working capital in an effective way. In the business, based on the examination over the trading background materials of the two parties including the trading contract and account statement, etc., IB held that it had met the requirements for supply chain loan to a core enterprise, and extended the loan.
Lin Xiaozhong, General Manager of Trade Finance Department of IB indicated that enterprises involved in the supply chain finance business all remain at the supply chain, so the key for banks was to analyze the characteristics of trade in the link of supply chain and provide financing solutions tallying with such characteristics.
Specifically speaking, the supply chain financial products run through the entire chain by embedding into the trading link. Lin said: “For instance, IB will provide accounts receivable financing to the upstream suppliers of core enterprises, helping them to collect back their sales incomes in advance and settle the problems regarding accounts receivable; provide advance payment financing to the downstream enterprises of core enterprises, helping those with such needs to accomplish procurement. Furthermore, if these upstream and downstream enterprises can provide some products that the bank recognizes, IB can also provide moveable assets financing to them, helping them to activate stock-in-trade and increase trading scale. Finally, for core enterprises, usually IB will provide suitable credit lines so that they can make payment at any time. In this way, we can provide financial services for the whole chain.”
Generally speaking, in the relations between IB, core enterprises and upstream and downstream enterprises, the core enterprises and their upstream and downstream enterprises all play the role of basic trader while IB provide funds and credit for the trade between them, ensuring the smooth progress of the trade.
With the economic globalization and the release of policies by the state to stimulate domestic demand, the trade between enterprises on all chains of international and domestic trade is on the increase, and the financing demand also grows significantly in the trading process. As shown by the data of the Ministry of Commerce, the balance of overseas accounts receivable of Chinese enterprises exceeded USD 100 billion as early as 2007, and the figure has kept growing at the rate of USD 15 billion each year. As shown by the statistics of the People's Bank of China, the total accounts receivable of Chinese enterprises account for about 30% of their total assets, higher than 20%, the level of advanced countries.
Nonetheless, the current economic situation is not optimistic. As a result, the trade financing and supply chain finance which is closely related to the real economy are confronted with grave tribulation, but quite a number of banks have made preparations against the situation.
It is reported that IB has its own unique perspective in the management of risks regarding supply chain finance and insists on propelling the sustained, healthy and stable development on the basis of controlling the substantial risks. In terms of practices, IB persists in checking the authenticity of trading background and examining the trading habits and relevant trade materials of customers, so as to ensure the bank's funds can be really used in the regular production and operation of enterprises. Considering the concentrated risk exposure in the steel trade industry in this year, IB carried out business inspection and overall investigation in a timely manner, guiding its business offices to develop business on the basis of controlling risks strictly.
A hidden war for supply chain finance
While the economic growth rate slows down now, the trade financing and supply chain finance are encountered with tribulation to achieve fast expansion. Nonetheless, with the boost of the accelerated progress of market-oriented interest rates, all banks will not rein up the pace to construct their competitive edges in the business field of supply chain finance.
As pointed out by Ni Jun, an analyst of Shenyin & Wanguo Securities, generally speaking, the entire supply chain finance market at home is not mature yet, and all banks remain in the stage of attracting and developing customers. In this period, the key to defeat opponents is to take the lead to attract more customers.
Compared with other joint-stock banks, IB is now constructing a unique comprehensive service mode for supply chain finance. The supply chain finance services provided by the bank cover the whole course of import and export trade of enterprises as well as their domestic trade, and the supply chain finance products extend to all links of enterprises, including advance payment, stock-in-trade and accounts receivable. Hence, the bank can provide enterprises with a package of comprehensive financial services covering financing, settlement, foreign exchange risk-avoiding service, and cross-border RMB service, etc.
“In IB, the positioning of supply chain finance is defined as the summation of standard and non-standard trade financing products that a bank provides to enterprises of a supply chain based on the trading characteristics in the links of procurement, stock-in-trade and sale in the supply chain,” Lin said, “in this business category, we fully lay store by the authenticity and self-liquidation of trade and mainly arrange financing solutions by way of flow control and closed operation. Generally speaking, we do not require enterprises to provide other guarantee or pledge.”
Since 2010, IB has begun to develop the business of supply chain finance vigorously and put forward the objective of “increasing shares in the mainstream markets and providing distinctive services in segment markets”. By reining core enterprises and various elements in the trading link, it has provided comprehensive financial services to upstream and downstream enterprises of industrial chains, meeting the financing demands of SMEs on various chains in an effective manner. It has increased its business shares in the mainstream supply chain markets such as automobile, electrical appliances, metallurgy, energy and bulk commodity year by year. Meanwhile, IB has gone deep into characteristic markets around China to promote customized financial services in the segment markets, making a group of successful cases in providing supply chain finance services to such industries as port finance service, liquor, sugar and clothing.
Lin indicated: “If a core enterprise has steady upstream and downstream customers and fine trading quality, it may receive the services our bank provides no matter it provides guarantee or pledge or not. We accept the selection of industries and enterprises in an open attitude.”
In fact, to attract “core enterprises” is an important guarantee for achieving business in supply chain finance. Just in this point, compared with veteran foreign banks in the field of trade financing, Chinese banks have showcased their comparative advantages and competitive strengths in the domestic market of supply chain finance.
“In competing for core enterprises on domestic supply chains, the reason that foreign banks fail to do as well as Chinese banks do lies in that they lack of core customers. It's sure that large banks have their advantages in terms of customers, but medium-sized ones also have their own comparative advantages.” As a vice president responsible for corporate finance of a joint-stock bank told the reporter, compared with state-owned banks, the medium-sized joint-stock bank face greater operation pressure, so they are more sensitive to the market, and have higher capability in innovation and implementation and higher financing efficiency. The four aspects are just the factors that some large enterprises stress in the field of supply chain finance. The reason lies in that, in actuality, many products need to be designed jointly by enterprises and banks.
To win the furious competition for supply chain finance, all banks should make use of their own advantages. By providing customized services, constructing a professional team and improving its product family, IB has established three advantages:
First, IB can flexibly respond to the individual demands of enterprises in an effective way. For any reasonable demand of an enterprise, if it is proved feasible with analysis and demonstration, IB may treat it as a special case.
Second, IB Head Office and branches have all established professional teams to provide product design and technical support. IB established the Trade Finance Department at its Head Office to carry out unified management over the business of supply chain finance. Now, the team has more than 400 professional product managers to provide customized supply chain finance solutions.
Third, IB has a comparatively well-established product family for the business of supply chain finance, capable of providing all-chain financial services covering the procurement, production, sale and transportation of enterprises. Meanwhile, it can also provide products and services through both the domestic trade financing business and international trade financing business.
It is said that IB has listed the business of supply chain finance as a wing of the “one body with two wings” for the corporate business development of the entire bank.
With the furthering specialization reform of corporate finance in IB, as an important part to the “one body with two wings” of corporate finance, the trade finance business of the bank has witnessed a good development momentum. As shown in its half-year report, in the first half year, the balance of IB's supply chain financing business reached RMB 277.434 billion (including domestic agency payment), up by 17.91%, an increase of RMB 42.138 billion over the beginning of this year. The bank has 244 core corporate customers of supply chain, increasing by 40 over the beginning of this year. Centering on core corporate customers, IB has developed 1,711 upstream and downstream customers in total, registering a business volume of supply chain finance worth RMB 54.34 billion.