Tuesday, July 17, 2012

ADB to Include Renminbi, Indian Rupee in Trade Finance Programme


Intra-regional trade transactions using renminbi and Indian rupee are expected to rise, prompting the Asian Development Bank (ADB) to start supporting deals denominated in these two Asian currencies under its Trade Finance Programme (TFP).
ADB’s Board of Directors today approved the inclusion of renminbi and Indian rupee in the TFP, which fills market gaps for trade finance by providing guarantees and loans to banks to support trade. Over 50 per cent of TFP’s portfolio has supported intra-regional trade and this move will bolster TFP’s ability to further enhance its support for trade within developing Asia.
The TFP, which has supported over $10.6 billion in trade since 2009, used to cover only transactions denominated in US dollars, yen and euros.
 “This move will encourage the use of regional currencies in trade and reduce reliance on the US dollar as a settlement currency, which is in short supply in many countries,” said head of ADB’s Trade Finance Programme Steven Beck. “It advances our promotion of trade in the region, which is crucial for boosting job creation and economic growth.”
Intra-regional trade in Asia in the next 10 years is expected to account for at least half of all foreign trade for Asian countries. At present, 90 per cent of all foreign trade in Asia is settled in US dollars, but this percentage is expected to decline.
The TFP is active in 16 countries, but focuses almost exclusively on taking risk in more challenging markets.  TFP’s most active markets have been Bangladesh, Viet Nam, Pakistan, Sri Lanka and Nepal, where market gaps are proportionally largest. TFP’s risk management is robust and the Program has never had a default or loss.
The gap for trade finance is enlarging due to financial deleveraging, tight credit supply from banks, low appetite for taking risk on many ADB countries of operation and tougher regulatory requirements from new Basel III guidelines. As a consequence, ADB decided to extend the TFP, which was set to expire by the end of 2013, for an indefinite period of time. TFP’s volumes have increased 40% in the first half of 2012 compared to the same period.
To address concerns about Basel III’s impact on trade, TFP initiated the creation of the ICC-ADB Trade Finance Default Register with the International Chamber of Commerce. In partnership with commercial banks from around the world, the register collected data on over five million trade finance transactions since 2005 and demonstrated a 0.02 per cent probability of default on this data set.  The statistics, the first of their kind for trade finance, were presented to the Basel Committee to substantiate the view that trade should be treated more appropriately for regulatory purposes.

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