Supply Chain Finance Gaining Traction in APAC Region

Small and Medium Enterprises (SMEs) play a major role in economic development. In developing economies, they account for 49 percent of formal manufacturing employment and contribute nearly 29 percent to GDP. In Asia Pacific region several countries including India is a home for millions of SMEs. The fundamental transformation in the last decade and the latest financial crisis has seen two major trends.

• Emergence of thousands of importers and exporters (SMEs) from the private sector adding impetus to the existing trade.
• Limited availability of funds associated with high costs has badly affected the enterprises, especially SMEs.

These two developments have some intertwined opportunities for trade finance banks. A trade pattern and lack of access to finance could be areas for banks both regionally and globally to tap. The supply chain finance concept has gained a lot of momentum and popularity in the past two to three years as banks have identified that this could be a good method to monetize open account transactions and increase customer services. Celent defines supply chain finance as “a combination of trade finance provided by a financial institution, a third party vendor, or a corporation itself. A technology platform unites both the trading parties and financial institution which provide financing electronically to ensure efficient use of capital across the value chain.” Supply Chain Finance can take three forms to offer financing. Several reasons like faster growth of GDP in developing Asia, increasing FDI especially in Asia & Latin America and dynamic South to South trade are some of the reasons that SCF gaining traction in developing economies more so in the South. This evolving trade pattern has put forth strong growth opportunities for Trade Finance banks. It is crucial for banks to develop right kind of SCF programs to extend their coverage to key trade hubs, especially since SMEs in the region have clear financing constraints. It is also of utmost importance to address specific industries which have clear financial bottlenecks across the supply chain. One of the key elements that will accelerate the growth of SCF programs is the limited financing capabilities available to Asian SMEs. We estimates that SCF programs in Asia will see an 18% increase in the coming three years (see Figure 1 on Page 4). Numerous SMEs in the region are part of the assembling/manufacturing value chain and hence could be integrated into buyer-centric SCF programs in other industries, the supplier SCF program would be more appropriate. Hence we think that Asia will be the center of intense competition between global and regional/local players.