6 Factors of Regulations that Impact the Launch of Supply Chain Financing Programs

Regulatory and legal frameworks significantly impact supply chain financing in any market. It determines how quickly cases of default can be addressed and how easily financial institutions can purchase and resell goods. Banks, NBFIs, and fintechs attempting to implement SCF programs must fully understand and account for the legal and regulatory frameworks of the regions and the countries in which they want to operate. 

Financial institutions looking to start supply chain finance initiatives must consider the following six types of regulations:

1. Standard receivables purchase agreements 

A ‘receivables purchase agreement’ is a contract whereby the bank or financial institution purchases the right to collect a supplier’s receivables in return for up-front cash under the local jurisdiction. The agreement documents any additional requirements or procedures per the respective jurisdiction, giving the buyer an opportunity to profit while the seller gains security. It also provides the financial institution the authority to enter into a legal contract with the relevant enterprise to collect receivables and the ability to pursue legal action in the event of default. More firms can now enter the supply chain market thanks to increased security and decreased risk.

For instance:

Under the Factoring Regulation Act 2011, which is now in effect in India, the borrower is required to assign their accounts receivable to the lending institution. With an account receivable assignment, the borrower retains ownership of the assigned receivables and, as a result, maintains the risk that some of the assigned receivables won’t be collected. In this situation, the lending company may directly claim payment from the borrower.

2. Payment term laws 

‘Payment terms’ refer to the criteria that must be fulfilled for a seller to complete a sale transaction. These clauses typically outline the maximum time frame a buyer is permitted to settle the outstanding sale amount. Since large buyers cannot request longer payment terms, this could negatively impact SCF (particularly reverse factoring).

Here’s an example of regulations impacting payment terms: 

In January 2021, the Australian government introduced the Payment Times Reporting Scheme, which mandated that large corporations and government agencies publish their small company payment terms and times (including SCF). The program lets small businesses choose which vendors to work with, improves transparency around large businesses’ payment performance, and provides incentives for faster and more reliable payments. [**Clayton Utz]

3. Basel III requirements 

Following the 2008 global financial crisis, the Bank for International Settlements introduced Basel III, a set of international regulatory reforms to enhance regulation, supervision, and risk management within the banking industry. Banks are now required to maintain minimum leverage ratios and capital requirements, mainly due to the credit crisis.

Supply chain finance benefits from Basel III primarily because the counterparty risk is lower than it would be under traditional SME lending. This is due to two key factors. 

  1. The risk is transferred to a large anchor buyer with a potentially stronger credit rating, resulting in decreased chances of default. 
  2. The likelihood of default is reduced because SCF is often a short-term lending instrument (less than one year), and the barrier to capital returns is lowered as a result.
4. Know-Your-Customer (KYC) 

“Know-Your-Customer” policies were implemented to standardize customer identification procedures. For financial institutions, stringent KYC regulations can be costly and time-consuming, leading to inflated costs in supply chain financing initiatives. Due to this, financial institutions only launch programs for their biggest suppliers and large buyers.

Impact of KYC measures in Asia:

Non-compliance could have a significant impact on financial institutions. A report by Fenergo found that authorities in the Asia Pacific region have recently increased enforcement. From 2008 to 2018, US$611 million in fines were levied, of which US$541 million was issued in 2018.

Due to Covid-19, Singapore has also modified some of its KYC regulations. A national digital identity card—Singpass—has been created for KYC requirements, including onboarding, verification, and authorization. Financial institutions can undertake e-KYC procedures using the Myinfo feature, and authorized agencies will not need to request physical documentation.

5. E-invoicing 

An electronic invoice is created, sent, and received in an organized electronic format that enables automatic and digital processing. E-invoicing regulations mandate that suppliers submit and approve digital invoices using government servers in a specified format. This invoice frequently serves as the mandatory bill of lading attached to every shipment. Financial institutions that operate in the supply chain industry are impacted in several ways. The first benefit is that it reduces the risk of fraud (double assignment of receivables) by storing all invoices in a central database. Second, since all suppliers adhere to a common invoice format, it considerably cuts operating costs for SCF programs. Finally, it provides quick financing by shortening the transaction processing time.

Prevalence of e-invoicing schemes across the ASEAN: 

  • One of the first nations in the ASEAN to adopt electronic invoicing is Singapore. Based on the PEPPOL (Pan-European Public Procurement Online) interoperability framework, the regulation became compulsory for government entities in 2018.
  • To ensure that the regulatory authority is correctly alerted, the Indonesian government launched e-Faktur Pajak, implemented by the DGT (Director General of Taxation), and mandated using e-invoices for businesses since 2016.
  • Thailand’s government unveiled a new policy in 2016 called “Thailand 4.0” to establish the country as a digital economy. And to meet these goals, e-invoicing, which is not currently mandatory, will need to be promoted extensively. That said, VAT parties can voluntarily transmit electronic invoices and receipts using the e-Tax system (designed for e-invoicing).
  • Vietnam is another nation where all businesses will be mandated to use electronic invoicing; however, this enforcement has been postponed until July 2022. The General Department of Taxation (GDT) advises companies that are prepared to move to electronic invoicing to register as soon as possible and begin the deployment.

Read more about the ‘Regulations and Policies that Govern SCF in Asia‘.

6. Electronic signatures  

Suppose all parties in the contract agree to adopt electronic documents and sign them digitally, this regulation provides legal validity to the signatures and records. It grants digital contracts the same legal status as written ones, enabling supply chain finance providers to approve contracts more quickly and effortlessly. Electronic signatures are legally enforceable in 27 nations, including the European Union, Canada, China, Russia, and the United States.

Facilitating better access to trade finance is becoming increasingly vital for developing nations, which frequently see gains in production opportunities due to shifting trade patterns. Although numerous factors affect global trade finance, legal and regulatory policies are an essential (but often disregarded) influence on the ability of the global value chain to stimulate overall economic progress.