The practice of trade financing and thinking

The practice and thinking about trade finance

In the past two years, with the macroeconomic adjustment, some industries have encountered difficulties, and even formed a regional systematic risk in individual areas, and the trade finance business is also inevitably affected. So do you know how to practice and think about trade finance?

Origin of domestic trade finance business

In the 1990s, Ping An Bank (formerly Shenzhen Development Bank, the same below) replaced liquidity loans with bill discounting business in its South China branches to provide financial support to its customers, and in 2001, Ping An Bank launched an important trade finance innovation product --In 2001, Ping An Bank launched another important trade finance innovation, the pledge credit of movable assets and cargo rights. This business breaks through the traditional credit guarantee mode by setting up a dynamic credit/pledge on movable assets of inventory type, and allowing enterprises to redeem part of the credit/pledge at any time for sales under the premise of maintaining the liquidity of the inventory, effectively solving the problem of financing difficulties of a large number of small and medium-sized private enterprises. 2003, Ping An Bank, on the basis of the original business and with reference to the international experience, integrated the trade finance products of accounts receivable, prepayment and inventory type by means of business process reengineering, and provided customers with financial support through the provision of trade finance products.

In 2003, Ping An Bank, based on its existing business and drawing on international experience, integrated its receivable, prepaid and inventory commodity trade finance products through business process reengineering, and was the first in the domestic banking industry to put forward the concept of "self-reimbursable trade finance", which was promoted throughout the bank, laying the foundation for a series of trade finance products.

The self-reimbursable trade finance rating system creatively breaks the limitations of the previous financing credit criteria based on the asset strength or guarantee of the lending enterprise, and instead focuses on examining the enterprise's trade background, as well as the mode of controlling the logistics and capital flow, thus deriving a new set of credit analysis and risk control techniques. Compared with traditional working capital loans, self-paying trade finance has the following distinctive features:

1. Self-payment of repayment source

That is, through the design of the operation mode, the sales income of the credit enterprise will be automatically directed back to the credit bank's specific account, and then return the loan or as a guarantee of returning the credit.

2, the operation of the closed

In practice, the commercial banks through the capital flow, logistics and information flow of the structured design of the implementation of the whole process of control from the accounts to the recovery of funds, that is, the realization of the credit funds of the guarantee or counter-guarantee, so as to achieve the purpose of risk mitigation.

3, to the post-loan operation as the core of risk control

that is, relatively reduce the weight of the evaluation of the financial statements of the enterprise, in terms of access control, emphasize the self-payment of the transaction mode and closed assessment, the establishment of post-loan operation of the professional platform, the implementation of post-loan full-process control.

4, the specificity of the use of credit

Based on the self-payment and process and the inherent requirements, trade finance is necessarily fiduciary payment, that is, each outgoing under the line of credit corresponds to a clear trade background, to achieve the amount of money, time, counterparty and other information to match. This is highly consistent with the spirit of the "three methods and one guideline" of the regulatory authorities.

This transformation is not only a new business blue ocean for domestic commercial banks, but also a new technical means to improve the quality of commercial banks' assets through a risk management system based on real trade background and transaction process control. Therefore, this is a revolutionary breakthrough. The concept of self-financing trade finance put forward by Ping An Bank has also become the theoretical guidance for domestic commercial banks to carry out trade finance business, which has had an impact till now.

Theoretical basis of trade finance business

Trade finance business originated in small and medium-sized joint-stock commercial banks, which is the result of the cruel competition in the financial industry. In the 1990s, in the context of the full liberalization of the financial industry, the competition among banks became more and more intense. The big four state-owned banks, such as ICBC and Bank of China, dominated the large customer market with their inherent networks and traditional strengths, while small and medium-sized banks like Ping An Bank were caught in the embarrassing situation of lack of core competitiveness and ambiguous positioning due to their unequal status. It is this situation that forces small and medium-sized joint-stock commercial banks to take the interest rate market-oriented, turn their attention to the vast number of small and medium-sized enterprises, to find a differentiated path suitable for their own development. Among them, Ping An Bank took the lead in proposing the strategic transformation of the company's business to "trade finance and small and medium-sized enterprises".

It should be said that the birth of the domestic trade finance business is a systematic financing arrangement proposed by small and medium-sized commercial banks in the context of fierce competition in the same industry, on the basis of in-depth analysis of the financing needs of small and medium-sized enterprises and the structure of the transaction, and with reference to the relevant provisions of the Basel Accord and the international advanced experience. Therefore, domestic trade finance is naturally based on both domestic business practices and advanced theoretical support from the international banking industry.

Articles 192 and 193 of the Basel Accord (June 2004 edition) define commodity financing for SPEs (special purpose entities) and reserve, inventory and accounts receivable financing for general corporations, respectively. Due to the difference in the credit object, there are subtle differences between the two, but the core of both is the financing arrangement based on the company's own trading behavior and transaction structure. 192 and 193 **** constitute the same concept of trade financing: trade financing refers to the financing of inventory, prepayment and accounts receivable based on commodity transactions where the bank applies structured short-term financing tools. For this type of financing, the borrower has no substantial assets on its balance sheet other than the proceeds from the sale of the commodity as a source of repayment, and therefore has no independent repayment capacity of its own. The structured nature of this type of financing is intended to compensate for the lower credit rating of the borrower. The risk of the financing is reflected primarily in the degree of self-repayment of the financing and the skill of the commercial bank in structuring the transaction, rather than the credit rating of the borrower itself.

From the point of view of an enterprise's transaction chain, a complete transaction chain will inevitably contain three major elements: payment to the upstream, purchased raw materials and finished products, and sales revenue. Accordingly, the trade finance business around the credit object transaction behavior must also contain prepayment financing, inventory financing, accounts receivable financing three major product categories, which is not only the inherent requirements of the principle of trade finance business, but also by the customer's actual demand decision. From another point of view, understanding and mastering the complete transaction chain and transaction structure of the credit subject is also more conducive to the formulation of commercial bank credit program and business risk prevention and control. Therefore, the trade finance business includes prepayment, inventory, receivables three business varieties is also determined by the inherent risk factors.

According to the differences in risk control systems and the problem-oriented latitude of the solutions, Ping An Bank divides the trade finance business into three major products, namely inventory financing, prepayment financing and accounts receivable financing, thus establishing a complete system of trade finance products. The categorization method is in line with the relevant provisions and concepts of the Basel Accord, and corresponds to the three major business clusters of export financing, trade financing and factoring of commercial banks mentioned in the Basel Accord Product Line Correspondence Table. With the 'development of domestic trade finance business, this classification method is gradually recognized by most other commercial banks. At present, the business structure, departmental arrangement and functional settings of trade finance business of most commercial banks also basically refer to this classification scheme.

Trade finance business practice

Under the guidance of trade finance business theory, Ping An Bank has independently developed a risk evaluation system for trade finance enterprises, and developed a series of trade finance products and business solutions through the introduction of risk-control variables and tracking and supervisory measures, such as core enterprises, logistics supervisory measures, capital flow guidance tools, and information flow monitoring tools.

Trade finance can be issued based on both the rating of the main body of the enterprise and the rating of a single debt. This feature is of particular significance to small and medium-sized private enterprise financing. Small and medium-sized private enterprises are *** the same characteristics of small scale, poor operational stability, statements are not true problems prevail. This situation leads to their credit position and bargaining power in banks being very low, and financing becomes very difficult. Therefore, the direct grasp of the enterprise's trade behavior and transaction information and control of trade under the capital flow and logistics, for the bank to prevent the credit risk of such enterprises has a special significance, but also can effectively improve the convenience of such enterprises to obtain bank loans.

Once the trade finance business was launched, it attracted widespread attention from the majority of small and medium-sized private enterprises, the banking industry, regulatory bodies and the media. The Financial Times has published an article pointing out that: in the various types of financial innovation for small and medium-sized enterprises' financing needs, the trade finance business launched by the Shenzhen Development Bank provides a new way of thinking. This financing model stands in the overall height of the industrial supply chain, meet the industrial economy, provide financial services, not only to avoid the long-standing troubles of small and medium-sized enterprises, but also extend the depth of the bank's services, in solving the small and medium-sized enterprises, especially trade-oriented small and medium-sized enterprises financing problems can be said to be unique. In addition, it is also a unique way to solve the financing problems of SMEs, especially trade-oriented SMEs. The scale of Ping An Bank's trade finance business has been rising year by year, and the customer base has been expanding and the quality of assets has been excellent all year round.

Along with the success of Ping An Bank's trade finance business, many industry peers also smelled the "huge market". Since 2005, other joint-stock commercial banks and the four major state-owned banks have followed suit and quickly began to compete for trade finance business. Especially in the past two years, with the entry of a large number of local banks such as city commercial banks, there are many imitators. Trade finance business has become an important area for commercial banks and enterprises to expand their development space and enhance their competitiveness. Most of the commercial banks in China have set up corresponding trade finance business departments and launched trade finance services with different characteristics.

Through in-depth observation of the trade finance business of representative domestic commercial banks such as Industrial, Everbright, Pudong Development, Guangfa, China Merchants and other foreign commercial banks such as Standard Chartered and JP Morgan, it is found that the trade finance business of these banks follows the Basel Accord definition of trade finance, and its business composition includes two major parts of international and domestic trade finance, covering prepayment, inventory, receivables and other three links. The business composition includes two major parts of international and domestic trade finance, covering prepayment, inventory and receivables. Among them, it is especially worth mentioning Pudong Development Bank and Guangfa Bank, which have restructured and innovated their business on the theoretical basis of traditional trade finance business. Pudong Development Bank in addition to trade finance business will be closely related to trade finance, inseparable cash management into the trade finance management department for unified management; Guangfa Bank is responsible for trade finance business of the Global Transaction Service Department in addition to trade finance and cash management, but also includes the management of asset custody business. The practice of these commercial banks further demonstrates the principle of trade finance, enriches the connotation of trade finance, and promotes the further development of trade finance business.

It is worth mentioning that trade finance has made extensive use of bills and other settlement tools, and has practiced the development direction of streaming loans and trade financing from the very beginning.

Trade finance business is centered around the credit subject of the transaction process, must rely on trade settlement. In practice, there are many kinds of trade settlement tools, in addition to cash also contains bills, letters of credit, collection and other settlement methods. In terms of bills, which are more widely used in domestic trade financing, as an innate trade settlement tool, they are characterized by low cost, causality, strong liquidity and traceability. For the credit subject, the application of bills can significantly improve its creditworthiness in the transaction, and save a certain amount of financial costs; for commercial banks, the causality and traceability of the bill is exactly in line with the endogenous requirements of trade financing, but also conducive to the control of credit risk.

The use of on-balance sheet and off-balance sheet financing tools greatly facilitates customer transactions and settlements, and also helps to reduce the capital consumption of commercial banks, which strongly promotes the development of trade finance business.

Future development of trade finance business

For a long time, the main source of profit of domestic commercial banks has been mainly deposit and loan spreads; in the way of operation is more sloppy, and the capital occupation is higher. However, in recent years, with the deepening of interest rate marketization and the improvement of regulatory standards, commercial banks have had to consider intensive operation, with the goal of achieving growth in business scale and increasing profitability on the basis of reducing capital consumption. Based on its self-reimbursement, process and product portfolio, trade financing is significantly better than liquidity loans in terms of profit level, risk control and capital consumption, and the difficulties faced by commercial banks have become an opportunity for the great development of trade financing business. In addition, trade financing based on real trade background, real solution to the financing difficulties of the majority of small and medium-sized private enterprises, and financial services to the real economy of the general tone is completely consistent. Over the years, the stream loan trade financing has been the first scale. It can be expected that with the rapid advancement of interest rate marketization and the implementation of new regulatory standards, this trend will be more significant. In the future, the domestic commercial banking industry will surely usher in another wave of trade finance development, both in terms of breadth, depth, and the profound impact on the real economy will be beyond the past.

The premise of the great development of trade finance business is to properly solve the current problems with forward-looking thinking and creative means. Especially in the economic downturn cycle, some issues deserve our attention.

One is the hard constraint of capital. After the release of Basel III, the China Banking Regulatory Commission (CBRC) formally implemented the "Measures for Capital Management of Commercial Banks (Trial)" on January 1, 2013, based on the integrated consideration of the requirements of Basel II and Basel III. The new capital agreement has increased banks' capital adequacy requirements and has redefined Tier 1 capital, so the most direct impact of the implementation of the new capital agreement is that some commercial banks will face long-term capital pressure. Compared with general stream lending, trade finance business, although the overall risk asset weight occupies less, but in the commercial banks facing hard constraints on capital, as well as also affected by the ripple effect.

Second, information asymmetry. The self-paying nature of trade finance and the process requires that commercial banks must grasp the business flow and logistics information generated by the transaction process, which depends on the degree of cooperation between the credit subject and the third-party partner. However, due to the limitations of the cooperation of the third-party partners and the opacity of the financial information of small and medium-sized enterprises, the problem of information asymmetry between banks and enterprises has not been fundamentally solved. This information asymmetry, on the one hand, causes the bank to be unable to make a judgment on the market prospects of the credit enterprise, on the other hand, also causes the commercial bank to be difficult to carry out accurate risk management.

Third, the legal environment needs to be further improved. In the domestic economy into the medium-speed development stage and economic restructuring gradually deepened the environment, the economic fluctuations caused by the past some of the hidden risks began to appear, and the cause of the risk events and commercial banks to deal with the dilemma faced by the domestic trade finance business related to the imperfections of the law and the supervision mechanism and part of the integrity of the enterprise's lack of. In particular, there are certain risks in the confirmation of ownership and the realization of collateral in the inventory business.

To solve the above dilemmas faced by trade finance, on the one hand, the government and regulatory authorities need to improve the system and laws, and effectively solve the system and legal deficiencies and obstacles; more importantly, the commercial banks themselves should be based on the needs of the market, relying on technological advances, and constantly carry out innovation and business restructuring. From the development trend of trade finance business, in the Internet Internet of Things technology is advancing rapidly, the rapid development of Internet finance and the rapid integration of the industrial chain today, the commercial bank trade finance business is bound to embark on the development direction of structuring, big data, investment banking.

1, risk mitigation and trading arrangements of the structured trend

From the traditional note financing, movable asset pledge financing to rely on the core enterprise "1 + N" type of industrial chain financing, trade finance in its development process has always had a certain structured characteristics. From the perspective of global experience, Structured Commodity Trade Finance refers to a series of structured designs such as commodity pledge, commercial paper, goods supervision, pick-up notice, commodity repurchase, capital flow management and futures value preservation, etc., which are used by banks to grasp the right of goods and arrange the financing mode according to the specific financing needs of enterprises. The core is the use of structured risk mitigation tools and the arrangement of structured capital transactions, which complement each other. (Financial Times: Actively using the futures market to carry out structured commodity trade finance business innovation, Jiang Yang)

Through the structured arrangement of trade finance, it can effectively reduce the threshold for enterprises to obtain bank credit and transfer or disperse the risk. In terms of the use of structural risk mitigation tools, banks can both introduce professional insurance (reassurance) institutions and cooperate with futures companies to carry out commodity hedging, thus establishing a new credit risk-sharing mechanism. At the same time, it can also actively pursue securitization of credit assets formed by trade financing, selectively introduce cash flow cutting technology, and issue asset securitization products supported by trade cash flow through cooperation with securities, trusts, exchanges, and other institutions, and supplemented by a preferential and inferior layering structure, which diversifies the systemic risks faced by banks to different types of investment groups in the bond market.

From the viewpoint of structuring the capital transaction arrangement, the traditional trade finance business is mainly based on the customer's transaction behavior for product design, and there is a certain lack of design of the capital arrangement. In today's increasingly diversified financial innovation, through the structuring of capital transaction arrangements, you can give full play to the role of commercial banks as transaction organizers and risk managers in the upstream and downstream transaction chain, and through the formation of risk buffer margin pools, industry funds led by industry-leading enterprises and other modes, enterprises in the industry chain are gradually guided from simple trade relations to industry interests*** winners, so that the bank's credit support as a means to realize the business chain's business interests. The support as a means to realize the long-term benign development of the ecosystem of enterprises in the industry chain.

2, information sources and the use of big data

The Internet has not only changed people's lives, but also had a huge and far-reaching impact on various financing activities. From the current point of view, the financial industry and the Internet industry innovation is still stuck in the financial Internet stage - the offline products, operations, sales migration to the Internet, and the value of the Internet's core "data" is still a lack of effective use.

Trade finance, based on the inherent requirements of self-payment and process, has a stronger demand for corporate information, and even needs a third party to assist in the collection and control of business and logistics information in the trade process. However, commercial banks used to use data information or single and isolated, only with data to process management, and not able to timely and accurately analyze the data behind the reflection of corporate behavior and abnormal changes and other important information.

The rapid development of e-commerce and the advancement of Internet of Things (IoT) technology have laid the foundation for big data in trade finance. Commercial banks can obtain trade data, logistics data, warehousing data, price data and other information on the trading chain from modern logistics information systems, ERP systems, Internet of Things, etc., by cooperating with core enterprises, logistics enterprises, electronic trading platforms and other organizations, and use tools such as machine learning and data mining to establish a series of trade finance models based on big data. These models can be used to analyze customers' trade behavior, customize adapted financial products and services, and also improve the internal process management level and risk management efficiency of commercial banks.

Trade finance business information sources and the use of big data, is based on the four streams of data analysis and modeling, in essence, the enterprise group trade behavior (including trading behavior, transport behavior, turnover behavior, production behavior, inventory behavior, etc.) modeling simulation. Through the data output of the model, dynamic, real-time commercial banks to provide business trade finance risk judgment and marketing decision support.

3, trade finance investment banking

The basic attribute of the bank is the financial intermediary, and the connotation of financial intermediary, far more than just a capital intermediary, but also contains a series of intermediary business information intermediary, transaction intermediary. The traditional commercial banks mostly operate foreign exchange and commodity businesses as capital intermediaries, while investment banks play the roles of information intermediaries and transaction intermediaries. In the trend of domestic financial mixed business more and more obvious, the commercial banks have to carry out investment banking business, and trade finance because of its characteristics based on commodity transactions, more than other commercial banking business investment banking basis.

Goldman Sachs (Goldman Sachs) as an example: since 1981, Goldman Sachs bought J. Aron & Company (specializing in commodity trade finance), Goldman Sachs has been in the field of commodity trade finance immersed in more than 30 years. 2009 Goldman Sachs in the field to create up to $ 5 billion in profits. The current chairman and chief executive officer of Goldman Sachs (CEO) Rauld Berkoffan emphasized that commodity trade finance is the bank's "a core and strategic business", "Goldman Sachs blood flow is commodity trade finance". It is in the field of commodity trade finance successful investment banking operations, Goldman Sachs from the 1970s Wall Street small and medium-sized investment bank to today's rapid development of the world's first investment bank.

In China, the process of investment banking in trade finance has just begun. Traditional trade finance focuses more on the financing itself, and meeting the diverse needs of customers is mostly an additional service. The investment banking of trade finance is under the current pattern of separate regulation in the financial sector, commercial banks are embedded in the trade process in the form of investment banking, providing trade aggregation, financing under trade, and direct participation in trade as a party in the trade chain. Trade finance investment banking, but also through the commodity hedging financing, basis difference transaction aggregation, cross-border multi-currency trade, overseas expansion, trade syndication and other effective combination of services, on the one hand, effectively broaden the bank's credit capital source channels, reduce the occupancy of risky assets, on the other hand, to improve the proportion of the bank's intermediary business income, so that the bank's business model is more diversified, to meet the differentiated financial needs of the enterprise.

The investment banking operation of trade finance makes commercial banks really participate in the whole process of enterprise trade, which not only strengthens the grasp of the authenticity of the trade background, but also really realizes the integration of capital flow, logistics, business flow and information flow.

With ICBC's acquisition of Standard Bank's commodity trade finance division in London, GF Securities' acquisition of Natixis' commodities division, Bank of China's establishment of BOCI Global Commodities, a subsidiary specializing in commodity trade finance, and Ping An Group's cooperation between banks and futures companies in launching the BOCI Global Commodities, we are now in the process of integrating the four flows of capital, logistics and information into one.

Trade finance is a systematic, structured financing arrangement by commercial banks for companies in the transaction chain, premised on a real trade background, and aimed at supporting the successful completion of transactions with financing, thereby enlivening the entire economy. Since its birth in the late 1990s, trade financing has experienced rapid development for more than a decade, solving the urgent financing needs of the majority of small and medium-sized enterprises with innovative means and prospering the market economy. This decade is also a process of continuous innovation and optimization of trade finance itself, with products and business models constantly enriched. In today's economic restructuring and diversification of financial needs, the changes in demand and the dilemma of development*** are the same as those that prompted trade finance to be continuously innovated in the direction of structuring, big data and investment banking. At the same time, all innovations must be based on a real trade background, with the starting point of better promoting the development of trade. If this is the case, then trade finance will certainly continue to play its powerful role in lubricating trade exchanges and promoting economic development.

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