Quicker and more cost-efficient financing available to suppliers earlier in the business cycle compared with conventional post-shipment supplier financing programs is especially relevant in today’s context, where prolonged trade disruptions and tighter credit lines can mean the difference between the survival and closure of a business, Muthukrishnan said.
DBS Bank will start to use supply chain data to assess a supplier’s performance and credit risk to deliver pre-shipment finance, unlike traditional models which resulted in suppliers being under-funded or unable to access necessary capital. The bank will work together with cloud software firm Infor to assess this.
The development of this financing option has been helped by the acceleration of global commodities supply chains toward a “digital-physical reset,” where contact-free trade financing is starting to become a norm due to Covid-19 restrictions.
“There used to be many procedures which require physical documents to be signed off with wet signatures, couriered and examined before a transaction can be completed. However, such processes were no longer feasible as businesses shut amid the circuit breaker in Singapore,” Muthukrishnan said.
Advantages of quicker settlement timing
The first movers into digital financing will reap the most benefits due to the quicker settlement turnaround times, the DBS head said, because this will result in greater cost savings from operational efficiencies and more efficient cashflows.
“This is especially important in the commodities sector given its fast-moving nature and the number of players involved,” Muthukrishnan added.
But current physical procedures are not obsolete. He acknowledged that pre-shipment financing processes like physical letters of credit (LC) and telegraphic transfers do address different customer needs at various stages of the trade life cycle.
“Pre-shipment financing is typically used to support suppliers in sourcing raw materials for manufacturing the finished goods or buyers who need to pay their suppliers in advance before shipment of goods,” he said.
“On the other hand, a buyer’s letter of credit is often required by sellers as soon as a shipment is made to mitigate against payment risk, while telegraphic transfers are merely the mode by which funds can be transferred electronically and directly to any part of the world,” he added.
Stringing together both digitization and current practices would provide an end-to end-solution that addresses clients’ individual needs and pain points.
Making opaque markets clearer
The supply chain offers an invaluable data source of both financial and non-financial data which are trapped in their often-siloed steps and buried under paper processes. Muthukrishnan believes digitization can assist to lift that veil to provide transparency to all market players involved.
“Blockchain technology is a front runner in this aspect given its decentralized, immutable and tamper-proof attributes,” he said.
In an earlier interview, Muthukrishnan explained the advantages of combining blockchain and DBS’ APIs, allowing the Southeast Asian bank to successfully provide digital financing services to contractual counterparties in an iron ore transaction in real-time.
“This is especially beneficial for small-to-medium sized suppliers embedded deep in the supply chain, as visibility to an underlying transaction with an industry anchor helps provide greater assurance on the authenticity and credit worthiness of the trade, providing banks the confidence to extend financing lines quicker and more cost efficiently,” Muthukrishnan said.
Digital financing success stories
An international trading house and two major miners have concluded trades using the blockchain technology since late 2019.
In November 2019, Trafigura and DBS Bank concluded their first pilot trade on an open-sourced blockchain trading platform for $20 million worth of African iron ore shipped to China.
In May 2020, Australian miner BHP and Baowu Steel Group completed their first blockchain-based iron ore transaction.
A month later, Rio Tinto used blockchain technology to clear a yuan-denominated iron ore deal that was facilitated by DBS Bank.