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Margin compression, KYC and AML haunt Asia's trade finance business
Trade finance in Asia remains under pressure from margin compression due to the continuing high level of liquidity in the region. This is more apparent in key markets such as China and India, particularly in the financial institutions’ space.
Chito Santiago 11 Nov 2014
Trade finance in Asia remains under pressure from margin compression due to the continuing high level of liquidity in the region. This is more apparent in key markets such as China and India, particularly in the financial institutions’ space.
 
Ray Zabarte, managing director and head of trade services for global transaction services at the Royal Bank of Scotland (RBS), says the situation makes top line pricing more challenging in terms of returns on risk-weighted assets. To adapt to these market conditions, RBS has refocused its trade business to have the right level of return on the amount of capital that it deploys.
 
“We are more selective today in the deals that we do as we have to get the right return for our capital,” he tells The Asset. “We face daily challenges in serving our clients in view of the capital requirements for trade finance. Of course, there are some players in Asia who are prepared to invest at a lower return in order to start relationships with clients.”
 
RBS will also offer its full range of capabilities to its customers. “When we serve our clients, it is not just about meeting their trade needs but also their requirements for their cash management and debt capital markets’ transactions,” Zabarte explains. “We will look at various products, all with different return profiles as we further enhance our relationship with our clients.”
 
In meeting its clients’ trade finance requirements, RBS has the capability to provide the shortest possible loan tenor of 10 days, because it has the traditional trade finance business of granting letters of credit, to as long as 10 years because of its export credit agency (ECA)-backed business.
 
Among other countries, China and India are two very important markets for RBS in Asia. “There are trade flows in and out of these markets and the size of their consumer and manufacturing bases are critical for our presence in the region,” says Zabarte, who joined RBS in February this year.
 
In addition to margin compression, the trade finance industry continues to deal with issues such as KYC (know your customer) and anti-money laundering. “They are big headwinds for the industry. When a client requests a transaction, we have to make sure that it has gone through the KYC process,” Zabarte points out.
 
The current process also involves making sure a potential client or particular trade is not in breach of a government’s sanctions regulations. “These necessary procedures take additional time and thus incur a higher cost. From the client perspective, it is a service level challenge; and for banks, it is a challenge from the cost perspective.”
 
Indeed, there is a linkage between cost and capital. “What used to be simple procedures in processing trade finance transactions have been added to bit by bit over time because of the various regulations – and banks need to maintain capital for operational risk,” the RBS executive adds.
 
He adds: “Clients have unique businesses with diverse customer and supplier bases across different countries. That is the challenge. And it naturally means more layers of risk controls. So it is important for us as bankers to step back and take a look at what is the better way of doing all of those procedures. As a result, banks are more discerning in putting their balance sheet to work, and RBS is no different in terms of such strategy.”
 
RBS, Zabarte adds, prefers to be proactive when it comes to regulations. “Regulations have objectives and they are important objectives.”
 

    

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