Banks turn cautious as risk of clients going belly up rises; LC fees shoot up
By SIOW LI SEN AND VINCENT WEE
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(SINGAPORE) As trust among banks breaks down and they shy away from risk, traders are finding it difficult to get letters of credit.
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| Mr Lee: Traders are resorting to making open cash trades now |
Both importers and exporters are complaining of this problem, which could have serious implications since LCs grease the wheels of trade.
According to the global payment platform Swift, the number of Singapore LCs from January to September has fallen some 30 per cent from a year ago. But for the same period, open account volumes - or wire transfers - have risen 7 per cent. With 8,300 members, including all major banks, Swift is a cooperative through which the financial world conducts its business.
Tan Kah Chye, Standard Chartered Bank global head of trade finance and transaction banking, reckons that, on a net basis, transaction volumes have fallen 10 per cent.
According to Mr Tan, those hard hit are small and medium sized companies and the very large commodity traders. Multinationals with funding capability mainly trade through wire transfers.
United Overseas Bank said that it takes a prudent approach in its credit assessment process regardless of market conditions, and requests for letters of credit are reviewed on a case-by-case basis.
With many countries in recession and mounting business failures, banks are naturally suspicious of issuing an LC in case the client goes under before the goods ordered have been sold and the bank paid.
'As a bank, you don't want to end up with a shipment of toilet bowls,' said a banker who ruefully recalls such an experience 10 years ago when a client went belly up.
As for confirming LCs, bankers are said to be extra careful because they do not want to take on the counterparty risk of the issuing bank going bust.
Consequently, LC fees have gone through the roof. In a year, the price of confirming an Indian bank LC has rocketed to 300 basis points from 30 basis points. Even MNCs now might have to pay 75 basis points from 25 basis points before.
'The concept of market price has disappeared,' said Mr Tan. He said that traders find they have to accept whatever price is quoted because it could disappear within hours.
DBS spokeswoman Edna Koh said that banks are reviewing their counterparty risks. 'As some commodities have experienced drastic price volatility, banks are also exercising caution in financing these transactions,' said Ms Koh.
On average, commodity prices in general over the last three months have fallen by 40 per cent. Matters have been made worse by currency fluctuations, with the Australian dollar plunging 20 per cent against the Singapore dollar over the last couple of months.
This could make some customers desperate. 'We're seeing higher losses because of deterioration in credit quality, more fraud and commercial disputes,' said Mr Tan.
Insurance broker ITI Solutions also estimated that there had been at least a 15 per cent drop in LCs issued between the first half and now.
'Very few LCs are being confirmed now,' said IFS Capital CEO Lee Soon Kie.
ITI Solutions CEO Freddie Lim. however. qualified that highly liquid commodities have the least problems getting trade credit. So food products such as rice and sugar would find it easier to get LCs as they can easily be resold for cash.
Other factors that would come into play include traders' relationships with one another and the banks. Life was naturally a little easier for large, established clients.
Mr Lee said that traders are resorting to making open cash trades now just to keep business flowing. This means that they take on all the credit risks themselves. This necessarily restricts the trade to just the bigger players such as Noble and Olam.
The malaise in commodities trading has spread to the shipping sector. The dry bulk sector has been the hardest hit as not only the number of cargoes but also their size has been hit by the lack of access to trade credit.
The decline is among the sharpest ever, said a broker at VShips Broker. 'The supply of tonnage has finally overtaken cargo demand. Two months ago, a 50,000 dwt vessel got about US$50,000 daily. Today, they are lucky to scrape US$4,000,' he added.
Darker days lie ahead. 'In the next 10-30 days, roughly 74 Panamax vessels will be chasing about 20 requirements,' he said.
Things are bad that handysize bulkers of below 35,000 dwt are being chartered for the price of bunker only - in other words, almost for free, said head of Asia operations at Drewry in Singapore, Divay Goel.
A broker said: 'There are virtually no sales of vessels, no bank loans available and a huge slowdown in trade as banks are refusing to open LCs. (We) need the world banking system to regain confidence in each other to lend each other money to facilitate opening LCs.'
Still, banks such as Standard Chartered and DBS said that they continue to support their customers, be they SMEs or larger corporates.
DBS said that its LC volume has remained stable in the third quarter. Its trade and remittance fee income rose 17 per cent in the third quarter from a year ago. Standard Chartered has been rated by Swift as Singapore's largest trade finance bank for the second year running.
'We see an increase in transaction volume of 25 to 45 per cent,' said Mr Tan.
Other than waiting for the storm to blow over, bankers are advising clients to hedge their risks.
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