ADB-OECD Workshop on Enhancing Financial Accessibility for SMEs

2013/3/7 Session 4

Supporting SMEs through Trade & Supply Chain Finance

ADB-OECD Workshop on SME Finance March 6-7, 2013 Christine Engstrom Private Sector Operations Department Financial Institutions Unit Head

SMEs in Asia Central to Growth and Development

SMEs can represent up to 95% of
the number of enterprises in a given country.

These SMEs operate a variety of

businesses from small scale manufacturing to services, such as tailoring or hair cutting/barbers.

Employment contribution is great

and can represent 50% of the formal sector alone.

SMEs can contribute up to 30-60%

of GDP.

Many of the SMEs are also

contribute to a countrys exports either directly or indirectly.

ADB-OECD Workshop on Enhancing Financial Accessibility for SMEs

2013/3/7 Session 4

Challenges for SMEs

Access to and cost of bank finance. Financial literacy. Limited collateral. Capacity constraints in terms of knowledge, technology, and production levels. Supply chain inefficiencies. Difficulties in responding to new market challenges. Regulatory. Difficulties interfacing and resolving problems with government agencies. Documentation issues.

ADBs Private Sector Solutions for SMEs

Trade Finance

Supply Chain Finance

Longer-term Loans to Banks + Technical Assistance

ADB-OECD Workshop on Enhancing Financial Accessibility for SMEs

2013/3/7 Session 4

ADBs Trade Finance Program

Trade Finance Program (TFP) provides guarantees and
loans through banks to support trade.

For 2012, the TFP supported over $4 billion in trade. 78% of TFP 2012 transactions supported SMEs. TFP Objectives:
1. Fill market gaps Low country ratings; Weaker banks in developing countries; Address the new normal; and Basel guidelines/regulatory requirements. 2. Make itself redundant

TFP Program Summary

Products Participants Exposure Limits Tenor Coverage Types of Transactions Currencies Costs Credit Guarantee (CG) and Revolving Credit Facility (RCF) More than 200 banks Participating bank limits: Varies on credit assessment Maximum three (3) years, but average tenor of portfolio is less than 102 days Up to 100% per individual transaction Letters of credit, guarantees, discounting, trade loans, and other instruments.

USD, Euro, and Yen soon RMB and INR to be added

No costs to join. Transaction fees are market-based.

ADB-OECD Workshop on Enhancing Financial Accessibility for SMEs

2013/3/7 Session 4

TFP Benefits to Developing Country Banks

1 Increase credit lines
2 Expand relationships with correspondent banks 3 Reduce cash collateral requirements 4 Enhance ability to maintain/attract clients 5 Provides critical support in times of crisis

TFP Benefits to non-ADB Developing Country Banks

1 2 3 Provides low risk access to new and challenging markets Expands geographic coverage to service export clients Leverages existing country lines and issuing bank limits

4 Provides capital relief under Basel requirements

ADB-OECD Workshop on Enhancing Financial Accessibility for SMEs

2013/3/7 Session 4

Sample transactions supported by TFP

Counter-Guarantee
Importer: Azerbaijan Exporter: Germany Confirming bank: Germany Product: Capital equipment for drying fruits Value: $600,000 USD Cover: 100%

Counter-Guarantee
Importer: Bangladesh Exporter: Hong Kong, PRC Confirming bank: Shenzhen, PRC Product: Telecommunications equipment Value: $16 million USD Cover: 50%

Trade Loan
Importer: Viet Nam Exporter: Singapore Confirming bank: USA Product: Dump trucks and excavators Value: $5 million USD Cover: 100%

Pre-Export Financing
Who: Bank based in Colombo, Sri Lanka Revolving Credit Facility: $6 million USD On-lend value: $250,000 Purpose: Pre-export finance Beneficiary: SME apparel manufacturer Location: Mawathagama Export markets: Europe, India, Russia. Export goods: Finished garments

TFP Geographic Overview

Supported 90 banks in 18 developing countries.
TFP is focused on the most challenging countries. Assumes no PRC, India, Thailand, or Malaysia risk. Top Six Countries in 2012:
Viet Nam Pakistan Bangladesh

Sri Lanka
Mongolia/Uzbekistan

Provided guarantees to 120 banks in 86 countries.

ADB-OECD Workshop on Enhancing Financial Accessibility for SMEs

2013/3/7 Session 4

Results
Growth of Transactions Supported
Growth of Supported Transactions 2004 to 2012
In mns
$4,000

$4,000 $3,523

$3,200

$2,765
$2,400

$1,896
$1,600

$800

$461 $7
$-

$31 2005

$18 2006

$64 2007 2008 2009 2010 2011 2012

2004

High Development Impact

No. of Transactions
2,032
1,803

1,577 1,366

1,063

783 668 443 297 441 263 277

Trade transactions 2009

Intraregional trade 2010 2011 2012

SMEs supported

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ADB-OECD Workshop on Enhancing Financial Accessibility for SMEs

2013/3/7 Session 4

Development Impact of Knowledge

Market wants knowledge
TFP filling knowledge gap

International banks are

introduced to new markets and are establishing country and bank/correspondent limits

2012 Best Asian DFI

Creates new partnerships

for co-financing in the most challenging markets

TFP Working to Make Itself Redundant

Crowding-in banks 60% of 2012 TFP co-financed Providing guarantees leads banks into new markets Crowding-in private insurance and others Filling data gap. ICC-ADB Trade Finance Default Register: proof to regulators and commercial banks of relatively low risk

ADB-OECD Workshop on Enhancing Financial Accessibility for SMEs

2013/3/7 Session 4

ADB and Supply Chain Finance

In November 2012, ADBs new $200 million Supply Chain Finance (SCF) Program was approved. Currently, SCF is under implementation. Vast improvements in physical supply chain (just-in-time; inventory innovations, etc.), but not in financial supply chain. Valuable financial resources locked in supply chain. Currently, SME growth is constrained. Program will broaden access to working capital for companies to support business expansion and job creation. Differs from the TFP: (i) company risk, not bank risk; (ii) open account trade, not documentary trade; (iii) will support SMEs that may never had access to finance.
Basic Supply Chain Illustration
Flows are either cross-border or domestic

Suppliers

Anchor

Distributors

Supplier Finance

Distributor finance

Source: Asian Development Bank.

ADB and Supply Chain Finance

SCF offers an innovative and solution for SMEs. approach

Risk assessment is not based on SMEs traditional Achilles heel (balance sheet + collateral). Focus of risk assessment is strength and stickiness (mutual dependence) of relationship between SME and its buyer(s).
Funding (30-180 days) and guarantees will be provided to PFIs and cover the risk of nonpayment by an obligor, which may be a supplier, a distributor, or an anchor. SCF will work with banks to share risk and funding in supply chains on a 50/50 basis.

ADB-OECD Workshop on Enhancing Financial Accessibility for SMEs

2013/3/7 Session 4

ADB Long-Term Finance/Technical Assistance

ADB also provides funding to banks in DMCs for onlending to SMEs. SMEs are in need of longer tenor financing and banks do not have access to longer tenor financing in many of ADBs DMCs. Some countries do not have interbank markets or interbank lending is very short, while most countries in Asia have underdeveloped capital markets. ADB will provide funding to banks for approximately 3-5 years. Recent transactions include: $15 million to Nations Trust Bank (Sri Lanka); $10 million for Kyrgyz Investment and (Kyrgyzstan); $65 million for four banks in Armenia.

Credit

Bank

ADB Long-Term Finance/Technical Assistance

Important to build capacity in banks to support sustainable lending activities. ADB will provide technical assistance to financial institutions along with funding for the following activities, amongst others: Risk management and credit assessment of SMEs; SME strategy; SME product development and marketing; Portfolio management; and Corporate governance.

ADB-OECD Workshop on Enhancing Financial Accessibility for SMEs

2013/3/7 Session 4

Thank you.

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