Regulations in Supply Chain Finance


Regulations in Supply Chain Finance


Even before starting to write this article (which, by the way, is on regulations affecting supply chain finance), I said to myself, “Don’t start another article talking about the 2007 global financial crisis. People have read enough about that.  Move on.” So, just this once, let’s put the crisis behind us.

You are not alone

From the buzz media has made, you will conclude that financial industry is the only sector that is affected by regulations.  Think again.  Pretty much everything is governed by regulations. Yes. Everything. Not necessarily Basel (I, II or III), Dodd-Frank, FATCA, OFAC or other alphabet jungle that probably infests your mind at this moment. Think of the pharmaceutical industry, making 25+ year investments that must negotiate a complex set of regulations designed to protect us post Thalidomide, to choose a crisis that puts the GFC into perspective.  The food industry and the horsemeat scandal.  Labeling, testing and “farm to fork” traceability.  Even Ferraris and McLaren’s, who have a set of F1 regulations to comply with on the race track. 

Imagine a world without regulations

Sounds wonderful.  Finally we can spend our money on making our bank do more of what we need them to do. Provide better customer service. Reduce costs. Improve the business and its profitability.


Park my car in the middle of the road.  Resell condemned food. Drive a car without brakes.  Try out new pills on people. This is not good. We need the regulations, not just for our safety (the driver’s safety, the diner’s safety, the patient’s safety) but for the safety of the entire equilibrium of system and society.

Cry of trade, an example

Back to the world of transaction banking. Let’s say I happen to be a supplier who export goods from India to Italy. This transaction would be a leap of faith, as I have no idea how genuine the buyer is. I invest all my resources, manufacture and send the goods to Italy and just as luck would have it, my buyer turns out to be fake. If such incidents occurred frequently, trade would never have flourished and we wouldn’t have gone global. Countries would be forced to be self-sufficient; there would be vehicles running but only in the oil bearing countries. Seafood would have been a delicacy only in the coastal countries and computers, well, they wouldn’t really have existed now, would they? So, I wouldn’t have written this article and you would never have read it.

So, how did trade flourish? How was the harmony brought in to the system? There are two other entities apart from the buyer and the seller who are like guardians of trade - banks and regulators.  Let’s see how they complement each other.

Banks take the hot seat

Buyers and suppliers were most affected when they had to pay for their trading expenses. Buyers had to risk spending cash-in-hand in order to pay for goods and wait for months to receive the finished goods from the supplier. Most of the buyers and suppliers were even unaware of other expenses in the supply chain and businesses crumbled because of shortage of working capital.

Banks took the initiative of funding buyers and suppliers in order to reduce complexities and ease working capital. In fact it has gone to the extent of financing buyers and suppliers at every stage of trade in order to synchronize the physical supply chain and financial supply chain, which, in modern terms is called as Supply Chain Finance (SCF).

SCF is something which came into existence in the recent past similar to working capital management. There is a very close connection between the two. The objective of SCF is to increase working capital of both the buyer and seller. The bank takes the risk of funding both parties to ensure that businesses don’t crumble due to paucity of funds. While it sounds extremely benevolent on part of the bank, they end up taking the blow from regulators 24/7, 365 days a year. Banks have played a crucial role in allowing trade to flourish globally and regulations ensure there is order in the system. The regulators take into account all the factors- buyers, suppliers, banks and economy of scales.

Regulator’s spin

Local regulations

When trade occurs between two countries, there are a set of regulations to be taken into account - local regulations on the buyer’s side, local regulations on the seller’s side and global regulations affecting both.  What’s permissible in one country may be illegal in another. Banks have an added responsibility of checking local regulations and legality of the goods being traded.

Global regulations

Regulations like Basel III are slated to have a huge impact on the transition from traditional trade finance to supply chain finance. The value of Letter of Credit (LC) is to be included in the balance sheet of the bank, causing a steep increase in cost of the financial product. Banks cannot provide a LC to trade, simply on the credit rating of the client. They should provide LCs based on the liquidity coverage ratio allotted for financing trade. The discussion and arguments have a long way to go and it is tough to predict what the future holds. But experts and analysts feel supply chain finance has huge potential owing to Basel III.


Banks have added responsibility of checking the type of trade and gathering knowledge on the parties involved. Indeed this is a major burden for trade banks. Getting qualitative and quantitative data is a challenge. The compliance angle takes another dimension as customer standards vary regionally. Often there are two sets of data to be checked - the buyer’s and the seller’s. Customers have to be screened against the list of banned or black listed organizations in order to prevent money laundering.


Sanctions have placed a great deal of pressure on banks and financial service organizations such as SWIFT, to follow and comply with the whole set of regulations which affect banking, shipping, trading, insurance and commodities. One of the latest sanctions SWIFT needed to deal with was it had to stop providing services to Iranian Banks as per EU regulations. Thus banks constantly require to be on the lookout for such sanctions.

Forget the crisis, think compliance

Another crisis may or may not happen but regulations are guaranteed as is the expected compliance. Banks can use compliance issues to their advantage by getting the systems in place for reporting needs. Compliance standards and using sophisticated solutions to offer innovative product offerings without any compromises on the regulations – yes, compliance enhances cost but revenues from trade finance are expected to increase by 68% by 2020. The additional cost can be covered by adding more customers. After all, the number of new customers is directly proportional to additional revenue.

Corporations gain the advantage of easy vendor management and banks gain the advantage of becoming the principle bank for both buyers and suppliers. Sounds like a win-win for all. And hey, there is no waiting for a slump in the market economy either.

Date Modified: 

Thursday, December 26, 2013
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