Banks give advice on appropriate risk management

Monday March 23, 2009

BANKS have turned cautious on trade financing for which demand has dropped by as much as 70% in certain cases.

While these facilities remain largely available, banks are requiring customers to be more aware of the factors that could affect the viability of their business plans.

According to HSBC Bank Malaysia Bhd director (trade and supply chain) Vivek Gupta, the bank has been extending trade finance as usual but with additional advice on appropriate risk management.

“Clients need to understand and anticipate much better than ever before in this challenging economic climate. They need to be aware of the changes in foreign exchange, bank and country risks and impact of falling demand on their cashflows.

“Enlightened clients engage effectively with banks and gain easier access to trade financing,” he told StarBiz.

In line with the slowdown in business, banks are also expected to experience a decreased demand for trade financing.

Gupta said the sluggish business environment was due to lower demand in terms of the number of units sold and the plunge in global commodity prices.

“Consequently, customers do not require as much working capital now as they used to before the financial crisis,” he said.

“Generally, for customers dealing in commodities, the average trade financing required from banks has now fallen by 60% to 70% from peak requirements,” he said.

Citi Malaysia head of treasury and trade solutions, global transaction services, Noel Saminathan, said trade financing for established exporters would remain available under the current sluggish economic conditions.

“Banks continue to assess applications based on viability of business plans, which among others, take into account the health of the export markets. Trade financing will continue to be offered competitively, yet prudently, by banks,” he said.

He added that export credit insurance could also help exporters improve the risk profile of their cashflow to gain better financing terms from banks.

“Global banks have the ability to assess and assume cross-border risks through our international networks. Risk premiums have risen generally across the world and we expect costs for credit protection to be elevated for the rest of the year,” he said.

Saminathan said credit costs were reflective of risk premiums, besides underlying cost of funds.

“The difficult interbank credit markets globally have increased costs for financing in international currencies but local currency financing remains less affected.

“Trade financing costs for medium to large Malaysian companies are among the most competitive in the Asia-Pacific region,” he said.

OCBC Bank (M) Bhd head of global trade finance, group transaction banking, Chuang Boon Kheng said that although trade financing in terms of letters of credit and pre-shipment financing were among the core products of banks, customers’ needs now might be skewed towards credit enhancement and credit protection solutions.

“Customers’ need for trade financing may have slipped since the financial turmoil due to reduction in orders while manufacturing companies may be resorting to ‘just in time’ inventory control practices.

“But we believe that in any economic environment, there will be industries that flourish and new enterprises will emerge with viable business plans. At the same time, there will be industries that might face a tougher operating environment and businesses that fail to plan for their survival.

“Individual banks will have their own target segments and expertise to continue to support viable enterprises,” she said.

Recently customers seemed to have regained confidence following the various positive initiatives put in place by the Government, Chuang said.

“We have seen customers start to order consumables, necessities and spare parts in small quantities from the start of this month. However, the volume of trade financing may not be there due to an ease in (product and commodity) prices,” she said.

· About 90% of world trade valued at US$14 trillion is funded via trade finance.

· Trade finance is also needed to bridge the gap between the time exporters deliver the products and receive payment from buyers.

· The most common trade finance facility is the letter of credit (LC) that includes pre-shipment finance, post-shipment finance and import finance.

http://thestar.com.my/news/story.asp?file=/2009/3/23/business/3465379&sec=business