World is a Buyer’s market | Trade Samaritan

World is a Buyer’s market

It is interesting to note how the industry is moving from traditional and well laid out instruments of trade finance to non-traditional instruments which are quick, liquid and usually short term.

As global trade continues to recover, open account transaction volumes are growing. Banks are losing out of commercial letter of credit business which also means a drop in associated services such as LC confirmation and LC advising. Banks are therefore providing a range of innovative products which suit the current global market scenario.

Even for businesses trading on open account, banks are becoming increasingly important providers of supporting finance and risk mitigation techniques.

It is interesting to note that open account volumes also indicate that world has become a buyer’s market. Under an open account transaction, exporter bears the risk of payment. The merchandise is shipped on credit terms and payment is received post expiry of the credit tenor. Exporters today are left with no choice but enter into an open account arrangement else they will lose the buyer.

Traditional instruments are thorough and involve a detailed disbursement process. These instruments are gradually being replaced with fast paced and short term supply chain finance instruments.

Traditional Instruments:

  • Letter of Credit
  • Collections
  • Standby Letter of Credit
  • Guarantees

ICC Global Survey published in 2013 suggests that the volumes for traditional products have dropped in the range of 2% – 5% whereas volumes for non-traditional sources of finance are showing an upward trend.

Non- traditional instruments:

Non-traditional products support Supply Chain of manufactures and hence are in great demand. Forfaiting and factoring inject the much needed finance into the Supply Chain of the exporters just at the right time. These products are instant and require minimum documentation. It can also been seen that cross border trade is increasingly becoming buyer centric and today importers are in a stronger position than the exporters.

Factoring is used by exporters in the developing countries. Factoring volume in China has grown by leaps and bounds in last 3 years.

Factoring

Cross-border factoring rose 36% in 2012, generating over Eur 23 billion in annual volume. Factoring industry has literally doubled over the last 2 years.

Trade credit insurance is an insurance policy and a risk management product offered by private insurance companies and governmental export credit agencies to business entities who wish to protect their accounts receivable. As we have discussed earlier, open account transactions are considered to be risky for the exporters who then opt for Trade credit insurance. Since the economic downturn of 2008, Trade credit insurance industry is accelerating. The highest level of short-term claims paid per country in 2012 were due to defaults in Italy (USD235 million), the US (USD172 million), the UK (USD134 million), Germany (USD133 million), and Spain (USD114 million). During the economic downturn, Europe and U.S were undoubtedly the most troubled economies and hence topped the list. ECAs total claims paid to customers increased slightly to USD2.6 billion, from 2.5 billion in 2011. The highest claims paid per country were due to defaults in Iran (USD501 million), Libya (USD457 million), South Korea (USD129 million), Ukraine (USD90 million), and Russia (USD79 million).

Export Credit insurance

With China officially rolling RMB in trade settlement across a number of regions in the country, forfaiting volumes are rising. Forfaiting involves transfer of risk from the exporter to the bank, the transactions are on the higher side both in terms of value and tenor. This could involve risk participation agreement from between 2 or more banks. While the statistics for cross border forfaiting volumes are not available, China and Russia have recorded highest forfaiting volumes over last 2 years.

Be it traditional or non-traditional, trade finance is considered to be providing a low-medium risk finance opportunity with stability and a high profit margin. Over the last 3 decades, banks across the world are increasingly working in a collaborated manner around the framework.  Increasing competition, inflation and trade barriers are negatively impacting the profit margins of the banks.

Banking industry today is much more sustainable and contributes heavily to world trade.

Exporters and sellers are aggressively competing for sales and market share, placing buyers or importers in a stronger negotiating position over trade and payment terms. This shift from traditional trade to open account reflects greater negotiating power for buyers or importers and is effectively seen as a buyers’ market. Banks and Financial institutions once upon a time chased the tier 1 section which comprises of meager 10% of the businesses whereas today banks are heavily catering to SMEs which constitute 80%-90% of the businesses in almost all economies. Exporters especially  in the emerging markets are performing below their optimum level of production capacity as they are facing shortage of funds. SMEs have a huge share of contribution when it comes to economic growth and hence banking financial norms should help reduce the gap between the demand and supply of short/medium term funds.

 

Reference

International Chamber of Commerce

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