From a credit risk perspective, the lifecycle of a Supply Chain Finance (“SCF”) or Accounts Receivables (“AR”) deal can be broken down into a number of specific steps, namely deal review and approval, client onboarding, deal execution, ongoing credit monitoring, and closure. While these steps generally align with traditional loan products, the market understands that short-term trade-related deals, such as SCF or AR, can have lower Loss Given Default (“LGD”) rates due to a number of factors, including the self-extinguishing nature of trade finance transactions, and the normally uncommitted nature in which they are provided.
Nevertheless, credit-related losses on these products do occasionally occur, and when they do, good credit risk management teams try to understand why the losses occurred and how to prevent similar losses from occurring on the future. Having been part of a number of these soul-searching exercises, I have come to truly believe the old adage “anyone can lend it out,the skill is in getting it back”.
Which brings us to the most fundamental part of credit risk management, in my opinion: ongoing monitoring. Historically the credit risk monitoring world relied on a level of trust. That trust was based on the quality of the relationship, receipt of the regular loan or trade repayments, and the regular collection of historic financial information. Ongoing relationship communication and annual reviews of client exposures gives everyone the base level of confidence. Using a risk-based approach means the higher the risk the more monitoring required, say quarterly or monthly as opposed to annually. All of these monitoring tools have been regulatory requirements and best practices for many years, and yet some risk departments continue to endure credit losses due to client failures.
The problem has always been that we are effectively always looking in the rear vision mirror and not at the road ahead. If a client is experiencing financial stress, it is often far too late to make appropriate credit decisions and reduce the exposure, which is the single most effective way to reduce overall losses.
The good news is that with the rapid rise of technology solutions we now have access to data allowing risk departments to monitor SCF and AR client trades, and the underlying client creditworthiness, in real-time. The ability to monitor trade transactions daily, such as we do on the Finverity Platform, and use that data to build an overall picture of normal trading conditions is a massive improvement in transaction monitoring. Being able to spot anomalies in trade flows and highlight any red flags in real time gives funders far more control over their exposures.
When this technology is added to the ability to review a client’s actual underlying financial performance on a daily basis in real-time via APIs linked into their respective accounting systems or ERPs, the improvement in credit decisioning and loss prevention is outstanding.
At Finverity, we have embarked on a journey to add daily monitoring of client’s financial performance as part of our overall product offering. In the SME and MME markets where there is information asymmetry, this is the most effective way of managing ongoing transaction monitoring and thus reducing credit losses. We have partnered with companies such as CODAT to provide the API links into the majority of accounting packages that clients use. Daily real-time reporting on client performance is at the touch of a button. Over time such data, combined with repayment and trade data, will allow us to build comprehensive credit profiles on these companies and offer more accessible and seamless products.
We believe this is a powerful tool that provides clear benefits for funders, and for clients, leads to lower pricing and higher levels of facilities because in the end, information is power, and data is king.
For more information, please contact Brett Downes, Chief Risk Officer at Finverity.