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7 Dec 2005


Trade Finance, 2006: Facing Challenges amid Ebbing International Trade


In 2005, commercial banks have been confronted with numerous factors affecting their trade finance business. Among them have been hikes in the key rate by the Bank of Thailand that has lifted their cost of funding in the money market, and sagging international trade value. (The latest data for 2005 indicates that the international trade value over the first ten months of this year had grown 21.59 percent, slowing from the growth of 24.86 percent recorded in 2004.) Stiffer competition in the banking sector as a result of upgrades in the status of financial institutions under the Financial Sector Master Plan has also dealt a blow to business. This will likely lead to more financial institutions becoming able to offer products and services to corporate customers in the future.

Trade finance includes financial products that commercial banks provide to importers and exporters for greater convenience in their business operations. Trade finance products comprise such instruments as Letters of Credit (L/C), Bills for Collection (B/C), Trust Receipts (T/R), Packing Credit, Shipping Guarantees and L./C loans. Other trade finance services include in-out remittances, foreign exchange services and hedging, as well as advisory services, etc.

Kasikorn Research Center (KResearch) takes the view that trade finance in the financial institution system should grow in line with the country's imports and exports that have emerged as a main driving force for national economic growth over the past several years. The import and export trade ratios to GDP stood at 44.29 percent and 45.70 percent, respectively, in 1997, increasing to 52.95 percent and 65.64 percent in 2004. In value, imports and exports rose to USD93,709 million and USD94,941 million, respectively, in 2004, from USD61,349 million and USD56,725 million in 1997.

However, in terms of the incomes of commercial banks, KResearch has found that there are still many pressuring factors impeding increased transaction volume from yielding higher income at the same rates. Interest income is being pressured by the upward interest trend, which affects costs to banks, but this cannot be offset by commensurate increases in lending rates because there is stiff price competition in the market. Concerning fee income, the trend in reduced volume in L/C transactions has resulted in commercial banks having to expedite turnover in other types of transactions.

In 2006, KResearch views that, apart from the higher interest trend continuing from 2005, which will affect the business operations of commercial banks, stiff rivalry in the trade finance market will also increase, as it is a buyers' market in which large customers with high negotiating power make up the main target group. In addition, this business has low risk, so it draws the attention of financial institutions to adjusting their business strategies accordingly and pay more attention to smaller importers, exporters and SMEs whose role in the export market is increasing; this is apart from expediting the creation of higher interest and fee income. Favorable factors that define an advantage in the trade finance business include expertise in checking documents, defining credit lines for customers, creating fast and easy processes for conducting transactions, creating good relations, and efficiency in operations to reduce costs to customers, as well as finding new customers to expand the market, etc. These factors will be important to respond to the falling volume of trade finance that is expected to slow further, which will be a challenge for financial institutions operating trade finance business in 2006.