Supply chain finance boasts great potential for growth

tHanH tu

Mr. Can Van Luc, chief economist, BIDV

Supply chain finance remains new and limited in Vietnam. A seminar on promoting the sale of supply chain financing (SCF) products held by BIDV on 5 November 2021 received interesting sharing on SCF problems and solutions.

According to Mr. Can Van Luc - chief economist and head of BIDV Training and Research Institute, Vietnam is an economy heavily dependent on trade, with a total import-export turnover of USD543 billion in 2020 (equivalent to 156 percent of the country’s GDP in 2020). Thanks to new-generation free trade agreements, Vietnamese businesses have the opportunity to access new markets as well as participate more deeply in the global value chain. Supply chain finance, therefore, has huge growth potential, and BIDV - the leading financial institution in Vietnam - should not ignore this market.

Supply chain finance can be understood as financial products that are provided to buyers or sellers in a supply chain, in order to optimize cash flow, minimize financial costs, mitigate risks and improve business efficiency. Some prominent products include receivables discounting (receivables discounting, factoring, payables financing, etc.) and commoditybacked financing (receivables-backed loan, distributor financing, inventory financing, pre-shipment financing). Given the development of global trade, supply chain financing achieved a good growth rate (about 5 percent annually in the period 2009-2017). However, the potential of this activity in the world is still quite large. Currently, small and medium-sized enterprises participating in the supply chain in most regions are experiencing financial shortages (about USD4.7 trillion). Trade finance is also short of USD1.1 trillion or 10 percent of the turnover.

SCF remains new and limited in Vietnam. KPMG estimated the potential of the SCF market in Vietnam at USD50 billion by 2021, but only a small part of this has been exploited. In 2020, more than 800,000 micro, small and mediumsized enterprises were registered to operate in Vietnam, equivalent to 98.1 percent of the total number of operating enterprises, accounting for 50 percent of Vietnam's GDP.

In Vietnam, despite the Covid-19 pandemic, the economy has shown

signs of recovery, especially in terms of trade. While global trade recorded a growth of 9.7 percent, Vietnam was one of the countries with good trade growth of 22 percent in 2020. However, the lack of working capital and banking services that finance transactions such as supply chain financing has partly affected the ability to receive large orders or develop new relationships with partners in the value chain. The situation is due to the scale of supply chain financing activities in Vietnam is too small (factoring in Vietnam only accounts for about 0.03 percent of the world). This is a good opportunity for BIDV to strongly develop these products in the coming time.

However, for successful implementation of this service, BIDV in particular as well as other banks in Vietnam will face many challenges. Firstly, for a supply chain that often covers many countries, multinational banks (HSBC, Citibank...) will dominate over domestic banks. Secondly, the legal framework for this activity has shortcomings (such as not allowing the implementation of factoring activities, discounting without recourse). In addition, there are other issues such as requirements on a complete supply chain financing platform; appropriate internal policies, etc.

To improve supply chain financing activities in the coming time, it is recommended that regulators soon finalize the legal corridor for this activity. Particularly, amending the Law on Credit Institutions with a broader, more complete definition of supply chain financing should be considered; and the implementation of without recourse services should be allowed. BIDV also needs to soon complete the SCF platform system to launch related products and services. A communication plan to promote the product and its benefits should also be put in place.