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    Banking on Credit


    International Trade Forum - Issue 1/2009

    The financial crisis has hit all elements of the global supply chains. National Development Banks and EXIM Banks need to step up to fill the gaps that have emerged so that trade and economic activity can continue.

    Having access to finance is like having a generator in case a power outage causes blackouts. You need your line of credit especially when there is a crisis, but if you manage your cash flow well, you may not need to access it during normal times.

    In 2009, we are not in normal times. The credit 'blackouts' have meant that even those firms with ample access to credit in the past are seeing lines cut, when in fact they need them most. Of course, this is not only in the developed countries where the crisis began; it has spread rapidly into the emerging markets. What makes this crisis unlike any we have seen in past decades is that its origins were in the 'sophisticated' markets but its impact has hit globally and is not isolated to any one region or country.

    In emerging markets, local banks have faced drastic reductions in trade lines because banks in Organization for Economic Cooperation and Development (OECD) countries have reduced cross-border exposures as a response to their own reduction in capital. Trade lines have been the easiest and least sensitive to cut, given that any bailouts from their governments have come with the requirement to do more domestic lending. Meanwhile, foreign banks in emerging markets have in some instances effectively pulled up stakes and gone home. Ironically, those countries whose banking systems hadn't been as internationalized may be better off and more immune from the crisis.
    Under these circumstances, banks in emerging markets are under stress to meet the financing needs of local companies - whether to issue letters of credit on behalf of the local buyer to import goods, or provide term lending. Of course, the same is true in developed markets. The consequence is that all parts of the global supply chain have been affected by the crisis, but not all equally and at the same time; this crisis has been more like waves striking the shores with various intensities.

    Lack of credit can quickly become more of an insolvency issue, when companies who otherwise are healthy and have good demand are faced with cash flow challenges as their customers delay payment to them.

    The role of the National Development Banks to ensure that companies - be they small and medium-sized enterprises or larger corporates - have access to affordable credit has never been more important in the last few decades than it is today. Moreover, Export-Import (EXIM) Banks have an equally critical role to play, as facilitators of trade through the provision of finance, guarantees or credit insurance. These institutions, which are typically government owned and controlled, need to analyse in detail their local market needs and the current and real market gaps that exist between supply of credit and demand for credit.

    Accurate diagnosis of the current problem is vital. Each country concerned needs to undertake a detailed analysis and assessment of the problem to be solved, the gap to be filled, and the policy objective and mechanism that will be applied to each problem and each gap. It is also important that account is taken and leveraging continues to be possible.

    There remains, as always, a danger in such institutions 'cutting and pasting' from other countries without due regard for the unique local circumstances, needs and challenges. There are no 'across the board' solutions; every country has its own macroeconomic, banking and trade characteristics, which in most cases require
    tailor-made solutions.

    In previous crises, it seems that the most successful facilities and initiatives tended to have two key characteristics: they were designed to meet specific rather than general objectives and problems; and they worked with existing market practices and documentation, and did not seek to reinvent mechanisms or to apply unduly complicated practices in areas like short-term trade finance where this would have been unrealistic. In the current financial crisis, National Development Banks and EXIM Banks need to take these elements into consideration, and step up to fill the gaps that have emerged so that trade and economic activity can continue.

    For more information seewww.i-financialconsulting.com

     Bridging the gap

    In assessing the financing gap, developing possible remedies and analysing their potential impacts on various stakeholders, National Development Banks and EXIM Banks should ask the following questions:

    • What is not happening that would be happening in 'normal' market conditions? Is it that banks cannot access liquidity to lend to customers? Is that that banks are no longer comfortable with the credit risk of customers? Or is it both?
    • How big is the gap? Is the problem with a handful of banks or it is system-wide? Is it with a handful of customers and sectors, or all sectors and company sizes?
    • What possible solutions or products could be developed that would not only fill the gap, but help facilitate private sources of finance to continue to play a role?
    • What triggers are in place to identify when the market has returned to normal and what is the exit strategy?
    • Finally, how will the market respond to the new solutions? Is there any risk of unintended consequences?