Yandraduth Googoolye: Trade finance in a global economy
Address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at
the Session on Trade Finance at the FICC-IBA Conference on "Global Banking: Paradigm
Shift", Mumbai, 13 September 2007.
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Ladies and Gentlemen
Good afternoon
It gives me great pleasure to be in Mumbai for the conference on "Global Banking: Paradigm
Shift" jointly organized by the Federation of Indian Chambers of Commerce and Industry
(FICCI) and the Indian Banks Association (IBA). I am also very pleased to chair this session
on Trade Finance this afternoon at Hilton Towers. I wish to extend my appreciation to the
FICCI and IBA for hosting this Conference. I also extend a warm welcome to the
distinguished speakers and to all delegates from South Asia, Middle East and Africa.
Before getting into the crux of the subject, may I mention that we are meeting at a very
auspicious moment as the people of this state and the Hindu community at large are
celebrating Ganesh Chaturthi. May Lord Ganesh bless us all!
Trade finance is a very specialized area requiring a thorough understanding of the
mechanics and the linkages among the various participants, and a good grasp of the risks
involved in trade finance. In the global economy, trade finance is gaining momentum.
Participants, particularly banks, are rethinking the way global transactions are currently being
done.
Finance and trade are linked in a number of ways that are not always obvious. Both are
important engines of growth in today's economies and the expansion of their share in output
shows their growing importance. Indeed trade finance has been a core business for banks
for decades. Traditionally, banks have offered to the trading community products that include
among others Letters of credits, Factoring, Early Pay or Dynamic Discounting and Asset
Based Lending.
Document-intensive letters of credit have indeed proved to be instrumental in the
development of international trade finance but it must be recognized that there are a number
of problems associated with traditional trade finance, for example the limited connectivity
among buyer, supplier and financial institution; limited controls for the supplier and most
importantly, the uncertainty of payment. The traditional way of doing business can
sometimes prove to be administratively cumbersome and inefficient and the costs involved
are high. Moreover, there are a number of risks associated with trade finance that, if not
properly managed, can prove to be fatal for the different stakeholders.
In a global economy, efficiency is the order of the day. Players in the international trading
arena - banks, suppliers, buyers and shippers are all striving to make the processes easier,
faster and cheaper. This is where the physical supply chain and the financial supply chain
have come together. This "marriage" is resulting in a shift from a SINGLE PRODUCT
solution to a SUPPLY CHAIN finance solution. Increasingly, banks, buyers, sellers,
insurance companies and logistics companies are joining hands to find solutions. On the one
hand, banks are setting up operation centres to centralise Letters of Credit, Document
Collection, Letters of Guarantee etc with a view to enhancing efficiency and professionalism,
and reduce costs and operation risks. They are more and more offering non-traditional
services which may include sophisticated imaging technology that can assist with dispute
and discrepancy management coupled with data storage, insurance products, document
preparation services, cash flow modeling etc. On the other hand, the logistics companies are
providing banks with two key elements - firstly the warehousing and transportation of the
goods and secondly the visibility into the movement of those goods. This increased visibility
into the supply chain encourages banks to extend credit to trading partners instead of issuing
letters of credit. The "marriage" of the physical and financial supply chain processes
therefore injects additional and more cost-effective liquidity into the system.
At the base of this shift from SINGLE PRODUCT solution to SUPPLY CHAIN finance
solution are advance in connectivity - the internet, new IT technology and applications and
efficient capital markets. For instance, readily accessible information improves the ability to
see where the goods are in the supply chain. If you send goods to Europe, you can log on to
DHL and track exactly where the goods are. In the same vein, banks which are extending
lines of credit against inventory or deciding when to make payments to sellers on behalf of
buyers need to know the whereabouts and the integrity of individual units rather than simply
knowing where the large shipments are in transport.
It is clear that banks not only provide finance but need to understand the entire supply chain
to give value added to their customers. In the process, there can only be a win-win situation
for banks and the other stakeholders.
I believe that collaboration brings benefits to all participants. Buyers are able to negotiate
better terms and conditions with the suppliers. Suppliers may have cheaper access to capital
and reduced costs. Funds providers may benefit from higher return on corporate risk than on
other products, they may have cross sell and increased lending opportunities. The
collaboration may also result in reduced risk for the country and the supplier.
However, the financial supply chain needs to be properly managed. There are numerous
challenges in embracing financial supply chain management. Invoices and inventory need to
be reconciled in a timely manner. If shipping information and payment information cannot be
combined, payments can be delayed that may result in increased costs. Managing foreign
exchange risk and cash flow liquidity risks may become a challenge. Contrary to banks, the
non-bank organizations participating in the financial supply chain may not have systems and
processes in place to manage credit risk and operational risk. There may be issues like the
legal enforceability of the collateral documents.
As I see it, the way forward to manage the financial supply chain is to fully embrace the use
of technology. However, one must keep in mind that systems alone cannot solve all
problems. It is people who need to first understand their environment in depth and come up
with the necessary solutions for an optimal global chain finance efficiency.
Mauritius is an open economy dependent on trade. Our geographical location may serve as
a linkage between Asia and Africa. The new opportunities arising in financial supply chain
management are relatively unexplored by our banks. I am confident that the representatives
of our commercial banks here today will benefit a lot from the expertise and experience of the
other bankers who have started providing financial supply chain solutions.
May I conclude by saying that the future of trade finance is very much dependent upon the
collaboration of all stakeholders - the buyer, the seller, the financial institution and the
logistics and insurance companies. However, from a regulator's perspective, there are issues
that need to be addressed such as the development of common standards and rules, the
long-term implications for the financial system of the partnership between banks and
nonbanks, and the proper management of the legal risks involved.
I now invite the distinguished experts in the field to enlighten us on the prospects and
challenges facing trade finance. I am sure that the ensuing discussions on the matter would
prove be very constructive.
Introducing the speakers
1. Mr J Chandrasekaran
Mr Chandrasekaran is the Chief General Manager, State Bank of India......
2. Mr Asif Raza
Mr Asif Raza is head of Asia Pacific trade & logistics Management for JPMorgan Treasury
Services and based in Singapore. In this capacity, Asif is responsible for origination,
structuring, product management, insurance, distribution activities and continue business
growth in Asia-Pacific. He leads a team of trade professionals specialized in trade
relationship management, risk mitigation strategies, logistic management, structured trade,
new trade services and emerging payment channel instruments to provide integrated
solutions to financial institutions and corporate clients.
Prior to his current role, Asif was head of Trade Sales for Europe, Middle East and Africa as
well as for the firm's global network trade business. He also worked at JPMorgan New York
for 7 years and managed various trade teams.
Asif is a regular speaker of trade industry conferences and has written articles on trade &
logistics Management. He is also member of Asian Advisory Council of Bankers' Association
for Finance and Trade.
3. Mr Subin Subaiah
Mr Subin Subaiah is a Senior Vice President of Bank of America, heading their Global
Treasury Services business across the Financial Institutions client space in Asia.
Prior to joining Bank of America in June 2005, Mr Subaiah spent 6 years with Deutsche
Bank, Singapore where he held the position of Managing Director in charge of FI
Relationship Management and had business line responsibilities for Deutsche's cash and
trade business in South/South East Asia and Australia.
Mr Subaiah spent his first twenty years in banking with Bankers Trust Company holding a
variety of senior positions in India, Hong Kong and Singapore in their transaction banking
and investment banking businesses, covering clients across Asia.
Thank you.