Global trade finance gap reaches $1.6 trillion, SMEs hardest hit: ADB

The inability of financial institutions to provide $1.6 trillion in support to buyers and sellers of goods across countries resulted in forgone growth and job creation in 2015, according to an Asian Development Bank (ADB) Brief released today.
Developing Asia’s share of the global trade finance gap was $692 billion, including India and the People’s Republic of China.?
In its new study, '2016 Trade Finance Gaps, Growth, and Jobs Survey,' ADB quantifies market gaps for trade finance and explores their impact on growth and jobs through a survey of over 337 banks in 114 countries and 791 firms in 96 countries. The annual survey is now in its fourth year.
"The growth of the trade finance gap in 2015 continues to be a drag on trade, and small- and medium-sized enterprises (SMEs) are the most affected,” said head of ADB’s Trade Finance Programme Steven Beck. "The survey shows that both globally and nationally, regulators and policymakers should increase support for trade finance through smarter banking regulations, more transparent and comprehensive credit ratings systems, and capacity building for local banks," he said, adding that ADB’s Trade Finance Programme stands ready to assist member countries and our client banks in all of these areas.
According to the brief, trade finance gaps persist in part due to the cost and complexity of compliance with banking regulations, with 90 per cent of surveyed banks citing anti-money laundering and know-your-client requirements as impediments to their ability to expand trade finance, especially for small businesses. Basel III banking regulations, which set liquidity requirements for bank finance, are also cited by 77 per cent of respondents as a major barrier to finance new trade.
The report notes small- and medium-sized enterprises (SMEs) face the greatest obstacles in accessing affordable trade financing.
Globally, 57 per cent of trade finance requests by SMEs are rejected, against just 10 per cent for multinational companies. High rejection rates lead many firms to turn to inefficient informal financing.
Financial technology (Fintech) can help bridge the financing gap for businesses left out of trade finance, according to the brief. But awareness of digital finance by small businesses remains low, with 70 per cent of responding companies indicating that they are unfamiliar with these tools. Among firms that were familiar with digital finance, peer-to-peer lending had the strongest uptake rates in developing countries.
Since 2009, ADB’s Trade Finance Programme has supported more than 8,200 SMEs across the region, with about 11,800 transactions valued at over $23.6 billion, in sectors ranging from commodities and capital goods, to medical supplies and consumer goods.
ADB, based in Manila, is dedicated to reducing poverty in Asia and the Pacific through inclusive economic growth, environmentally sustainable growth, and regional integration. Established in 1966, ADB in December 2016 will mark 50 years of development partnership in Asia. It is owned by 67 members, 48 from the region. In 2015, ADB assistance totaled $27.2 billion, including cofinancing of $10.7 billion.

Banks have to increase paid up capital gradually within six years

The banks will have to increase their paid up capital within next six years as the central bank is planning to implement the Basel III to minimise the market risk.

The paid up capital for the new commercial banks will be Rs 5 billion, under the Basel III requirement as they have to increase minimum capital, equity capital ratio and buffer capital. Currently, they have to have Rs 2 billion paid up capital. They have to gradually increase the paid upto capital like in the next two years, they have to increase their paid up capital to Rs 3 billion, in five years Rs 4 billion and six years, Rs 5 billion. "It is expected to make the banks stronger," the central bank said, adding that the development banks also have to be ready to implement Basel III, though it's implemented for the commercial banks only in the beginning.

After the successful six years of the Basel II in commercial banks, the new challenges have called for the Basel III that is going to bring changes in the capital adequacy framework, the central bank said.

There were three pillars – minimum capital requirement, supervisory review and disclosure – under the capital adequacy framework of Basel II, but after the global financial crisis, there has been significant addition.

There were challenges towards managing risk within the banking system as well as reducing the spillover risk from the financial sector to the real economy. Basel Committee on Banking Supervision (BCBS) issued 'Basel III: A global regulatory framework for more resilient banks and banking systems' in December 2010. Basel III has set its objectives to improve the shock absorbing capacity of each and every individual bank as the first order of defense. In addition to the measures, the efforts were directed to ensure that banking

system as a whole does not weaken and its spillover impact on the real economy is minimised.

Thus central bank has also planned to implement the Basel III – after consultation with the banks and financial institutions – in s month to safeguard the financial system, the Nepal Rastra Bank (NRB) said.

Basel III has included some micro-prudential elements – like definition of capital, better risk coverage, leverage ratio and international liquidity framework – so that risk is managed in each individual institution and macro-prudential elements will take care of issues relating to the systemic risk.

Likewise, the leverage ratio has been proposed at three per cent and capital conservation buffer 2.5 per cent of risk weighted average to strengthen the banks and financial institutions.

Similarly, counter cyclical capital buffer has also been proposed to 2.5 per cent apart from a forward looking and dynamic provisioning, and addressing systemic risk and interconnectedness. "The capital requirement has also been doubled," it said, adding that Tier 1 and Tier 2 capital has also been increased.

The new arrangements calls for an increase in paid up capital, according to the central bank.

Healthy bond market crucial to funding Asia's infrastructure needs: ADB

Asia needs a robust bond market that can match the financing requirements of huge infrastructure projects in the region and the growing appetite for long-term assets among local pension and insurance companies, a seminar at the Asian Development Bank’s (ADB) 46^th Annual Meeting heard today.

“Pension funds, insurers, sovereign wealth funds and other holders of long-term money could provide a real shot in the arm for private infrastructure investment, particularly through bond markets,” ADB vice-president for Private Sector and Cofinancing Operations Lakshmi Venkatachalam, told the seminar. “The problem right now is that the project risk profiles and investors’ risk appetite are largely not matched,” he added.

Beyond a handful of active countries and sectors, infrastructure project financing in Asia remains under-developed and under-served – despite the region’s significant savings.

The economic slowdown in Europe and pressure from Basel III have curtailed the risk appetite of international banks, while banks in Asia are too focused on their own markets, and only for favored sectors such as oil, gas, and power. Banks in the People’s Republic of China and India are among the most active project finance players in their home markets.

Last year, ADB approved a first-of-a-kind $128 million facility, developed with India Infrastructure Finance Company Limited (IIFCL). ADB and Indian finance companies will provide partial guarantees on rupee-denominated bonds issued by Indian companies to finance infrastructure projects. ADB will then assume part of that guarantee risk in the expectation that the initiative will free up bank loans for redeployment into new projects, channeling more funds for public infrastructure bonds in India, international bonds for Indian projects, and even for projects beyond India in the near future.

Another encouraging sign for the public finance market is that Asian governments are now more receptive to the concept of public-private partnership, and are lining up rigorously selected and better-designed infrastructure projects for possible financing.

In the meantime, international financial institutions are expanding their activities and products towards private infrastructure finance to help fill the current gaps.