Industrial Bank (IB) is furthering its specialization reform of corporate finance lines, which can be seen from the reform of trade finance business, an important part to the “one body with two wings” of its corporate finance lines, and the reform achievements.
As is learnt by the reporter, the function of risk management has been embedded into the Trade Finance Department of IB Head Office, and an organization system for matrix-based risk management and a working mechanism has been established preliminarily. In addition, IB is preparing to establish the Auto Finance Business Headquarters, which will become a pilot project for the reform of corporate finance.
Such an action is not only a part of the whole story that IB has launched its specialization reform of business lines, but will also further consolidate the all-chain and all-course supply chain finance system of the bank.
With the diversifying financial demands, the competition of the finance sector becomes increasingly fierce, and the focus of competition has shifted from single products and conventional businesses to innovation in product portfolio and all-sided integrated services. The supply chain finance of IB covers the upstream and downstream enterprises and core enterprises of all-industry chain in the model of “M+1+N”, meeting the diversified financial service demands of enterprises engaging in domestic trade and cross-border trade. It has become one of the important guarantees for IB to improve its core competitive edges in the corporate finance lines.
“M+1+N” model covering all-industry chain
With brand building and technical innovation, more and more outstanding enterprises at home became core enterprises in supply chains. In order to extend the market, these enterprises kept improving their business models. As a result, they put forward higher requirements for the financial services of banks.
It is said that, in order to adapt to the diversified demands of the real economy and respond to the varying market environment, IB proposed the “one body with two wings” strategic planning for corporate finance in 2010. “One body” means the traditional credit business of corporate finance; “two wings” first refer to the function-updated payment and settlement businesses covering supply chain and cash management, and second the diversified financing businesses including investment banking and financial lease.
In September 2010, IB formally prepared to build the Trade Finance Center, starting to construct the basic framework for supply chain finance and improve the product family. With the foundation tamped in 2011, the supply chain finance of the bank formed the development model of “M+1+N”, accomplishing the basic institutional framework of supply chain in a year on the whole, which other banks need four to five years to establish. It created all-chain supply chain finance service system including advance payment, stock-in-trade and accounts receivable, covering all process of domestic trade and import and export trade.
At present, the supply chain finance models of banks vary from each other. In the “M+1+N” model adopted by IB, “1” refers to the core enterprise on a supply chain, “M” the upstream suppliers, and “N” downstream purchasers. IB embeds its supply chain finance products into all trading links to run through the entire supply chain.
Lin Xiaozhong, General Manager of Trade Finance Department of IB, introduced, "In this model, we provide accounts receivable financing to upstream suppliers of the core enterprise, helping them to collect back their sales incomes in advance; meanwhile, we provide advance payment financing to the downstream enterprises of the core enterprise, helping them to accomplish procurement. Additionally, if an enterprise needs financing from a bank but lacks tangible real property or fixed assets, such as workshop, machine, equipment and land, for pledge, we may accept the stock materials including finished products or semi-finished products as the guarantee to provide stock-in-trade financing.”
“We carry out product design and risk control by analyzing the trading links and demands between the upstream and downstream enterprises and core enterprises. Bank attaches importance to the overall credit strength, business prospect, and guarantee capability of core enterprises which assume certain responsibilities of process monitoring, goods storage, repo or assurance for the financing of upstream and downstream enterprises”, the Trade Finance Department of IB explained. In the “M+1+N” model, the supply chain finance of IB covers all links of advance payment, stock-in-trade and accounts receivable of enterprises, capable of providing them with a package of integrated financial services including financing, settlement, foreign exchange risk-avoiding service, and cross-border RMB service, etc.
Compared with other banks, IB runs through both upstream and downstream enterprises in the supply chain in the “M+1+N” model, and forms a complete industrial chain according to the supply chain relationships both downstream and upstream and transverse collaborative chain relationships of enterprises. This is different from the “1+N” model of other banks which targets at only the upstream or downstream of core enterprises.
The above relevant officer of the Trade Finance Department of IB believe that, in the “N+1” or “1+N” model, banks are not fully involved in the trading links of an entire chain both downstream and upstream, but in the supply chain finance, banks control risks mainly based on controlling the all course trading elements and trading links.
Meanwhile, embedding the supporting reform including risk management into business lines is more helpful for the bank to provide customers with all course supply chain finance services.
"Our Trade Finance Department was primarily used to be a product development and marketing division. But, in the reform of corporate finance in this year, the functions of credit approval and risk control have been embedded into the department. Formerly, the credit approval of risk management was done by the Head Office in a centralized manner. Now, some authorities are given to the business lines for examination and approval, namely the trade finance line has its own independent department for product design, credit approval and risk management. Thus, the line can not only improve the approval efficiency, but also control the risk points of businesses more deeply", said the above relevant officer of the Trade Finance Department of IB.
“Nationwide Business Handling”
Two years after the business was released, IB meets the all-sided demands of core enterprises and upstream and downstream enterprises of supply chains for financing, settlement, foreign exchange risk-avoiding service, and cross-border trade to the largest extent through carrying out all-chain and all-course management over the dozens of supply chain finance service products in the three categories: advance payment, stock-in-trade and accounts receivable.
It is well-known that, due to the dispersed distribution of upstream and downstream enterprises of a core enterprise, in fact the customer manager of a bank can hardly have field investigation over all the upstream and downstream enterprises of the core enterprise comprehensively and learn their operating and financial situations accurately. Moreover, the upstream and downstream enterprises may be located across China. Consequently, in the traditional credit extension model, if the bank intends to provide the accounts receivable financing or advance payment financing to such upstream and downstream enterprises, it would encounter the problem of credit extension to non-local enterprises, which usually involves complicated approval procedure within a bank. More possibly, it must be reported to the superior bank for examination and approval case by case, and the process of approval is very long.
IB's business model of “Nationwide Business Handling” breaks through the handicaps of conventional credit mode. For instance, A company, a customer of IB Shanghai Branch, is a core enterprise, and one of its non-local downstream purchasers needs money to buy products from A company. The conventional buyer credit business requires Shanghai Branch to obtain the handling right of the non-local enterprise first and then it can proceed with relevant credit extension business. As a result, it involves a long procedure and complicated management. In the model of “Nationwide Business Handling”, IB Shanghai Branch can sign a business cooperation agreement with A company, and apply to act as the host bank of A company while all branches of IB around China may act as the coordinating banks. In this way, the downstream enterprise can conveniently acquire financing. Meanwhile, the coordinating banks know more about the upstream and downstream enterprises, and it is helpful for the bank to control risks in an all-round manner. Furthermore, the host bank may have a deeper understanding to the core enterprise and its trading relationship with its upstream and downstream enterprises.
At present, supply chain finance has become a main force in the corporate finance line of IB in parallel with investment banking, cash management, green finance and small-sized enterprises oriented finance. With the specialization reform of corporate finance at the beginning of this year, the corporate finance businesses of IB have been improved in such aspects as resource distribution, business collaboration, and product innovation. The bank further showcases its competitive edges in providing integrated financial services to enterprises. Grasping the opportunity of specialization reform of corporate finance, the supply chain finance of IB will, based on a well-established product system and a professional service team, actively promote internal collaboration, striving to provide all-chain and all-sided supply chain finance services integrating financing, settlement, wealth management, cash management, investment banking and green finance.