Trade Finance In Times of Coronavirus: Analysing Alternatives
Cash flow strains will be the first biggest predicament after the lockdowns.
At an unprecedented time in global history, almost a century after the Spanish Flu hit the planet, the world is witnessing its worst health crisis.
A novel coronavirus has crippled the global economy. Businesses are cancelling orders, deliveries and movement of goods and services barring just the essentials, and are facing shut facilities and halt all work. The COVID-19 pandemic, which started from Wuhan in China, has spread worldwide and caused grave uncertainty, even making it difficult to predict a recovery.
This black swan event is set to stall that one activity that is paramount to running any business—lending. For a business to continue seamless operations, capital plays a pivotal role and there is little doubt the latest pandemic will affect it.
The governments of all countries, including India, have announced severe restrictions on businesses and households to avert community transmission. These will undoubtedly increase pressure on privately run small- and medium-sized companies that contribute a majority of growth of an economy.
The threat of infection, which has led to over 700 confirmed cases in India and killed over 18,000 worldwide as of the time of writing this article, has led to the shutting down of production facilities and disrupted component supply chains across industries. This is expected to hurt import and export cycles drastically, alike to the impact seen in a recession.
Even once the pandemic is controlled like in the case of China and Singapore to some extent, importers will likely have a backlog of orders to be met. This will require working capital. Exporters, too, will be in dire need of operational capital to get the business back to recovery. Warehouses globally will need stocking, and hygiene practices will require a fresh infusion of capital.
Cash flow strains will be the first biggest predicament after the lockdowns. Companies' rainy-day funds are likely to dry out with no or minimum cash cushion in the largely unorganized sector of SME imports and exports. The global shortage of funds will need to be catered to.
The International Monetary Fund (IMF) has warned a "coronavirus recession' could be worse than the one caused by the 2008 financial crisis. As businesses around the world scramble to keep afloat in these times of economic stress, a sliver of hope exists in business-lending opportunities. In such a scenario, injecting life into the SME sector will need to take center stage.
Trade finance companies can provide the additional working capital needed by importers, exporters, warehouses and others in the global supply chain.
China is encouraging its banks to offer more trade finance to get the economy back on track as the country braces to lift sanctions likely around mid-April. China's overall exports contracted by 17.2 per cent in dollar terms in January and February, and imports fell by 4 per cent. The Chinese government recognizes the importance of restarting exports to get its economy back on track and has promised to do all it can to facilitate the same.
For a country such as India that has among the world's largest SME numbers, the export-import deficit during the lockdown is expected to be high. One will be able to understand the true range of the impact only once the pandemic's effects recede.
Faltering demand in the US and Europe, which are now the worst hit after China, are indicators of an unforeseen business environment for India's SMEs too.
But is India equipped with the armament needed once the world is past this crisis? The answer could be a yes.
Foreign trade is facing relatively large difficulties with the epidemic yet to be contained worldwide. Declining trade volumes will lead to a need for more flexible and agile sources of finance and alternative trade finance companies are likely to rise to the occasion.
Trade Finance Companies To Lead
In the post-pandemic recovery phase, trade finance companies armed with technology and data will be the only way to address a digital-first business ecosystem that will prevail once the country comes out of the threat of the coronavirus infection.
India's share in global trade (merchandise and services) was 2.1 per cent ($481.74 billion out of total $23,044 billion) for exports and 2.6 per cent ($600.62 billion out of total $23,112 billion) for imports in 2017. Exports have been growing on a regular basis since 2016-17 for almost three years and total exports reached a new peak of more than half a trillion dollars, for the first time in 2018-19.
While the commerce ministry's trade data for February 2020 showed a minor growth in India's exports for the first time in six months, multiple stakeholders have warned the trend is unlikely to continue in March. This disruption in the growth trajectory, caused by COVID-19, will need enhanced supply chain efficiency to improve transparency and trust that ensures India springs back from the gloom.
Indian banks, which are already battling with an issue of high non-performing assets, are going to be hard-pressed for financing in the wake of the pandemic. The lockdowns are likely to cause billions of dollars in potential losses of goods and services, and negatively impact the business performance of many businesses, particularly SMEs. Despite the finance minister's recent announcement indicating compliance relief and the proposed economic stimulus, the fact remains that many banks will face issues in providing finances to SMEs because of regulatory constraints that require healthy financial statements.
In such a situation, alternative trade finance platforms will be able to step in and provide the solutions needed. By leveraging alternate data metrics and technology, these digital-first offerings will be crucial in helping SMEs gain access to much-needed working capital and thereby restart the growth engine of the Indian economy.
The IMF expects an economic rebound in 2021. The faster the virus stops, the quicker and stronger the recovery will be as projected by the global body. For businesses to find their footing once again, all stakeholders—policymakers, businesses, and financiers—will need to adopt a stringent approach towards embracing technology. Trade finance companies backed by such tech may indeed be the answer businesses need to rebound in the post-corona crisis world.