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lank%22%3Erestructuring%20or%20reducing%3C/a%3E%20their%20commodities%20business%20to%20cut%20risk.%20Banks%20have%20suffered%20losses%20%3Ca%20href=%22https://fintechzoom.com/fintech-news-banking/after-9-billion-credit-hit-banks-seek-trade-finance-overhaul/%22%20target=%22_blank%22%3Eto%20the%20tune%20of%3C/a%3E%20$9%20billion%20from%20the%20$18%20trillion%20commerce%20finance%20enterprise.%3C/p%3E%3C/div%3E%3C/div%3E%3Cdiv%3E%3Cdiv%3E%3Cp%3EThe%20gap%20left%20by%20ABN%20Amro%20is%20likely%20to%20be%20the%20tune%20of%20$21%20billion%20and%20the%20big%20banks%20that%20remain%20in%20the%20business%20may%20not%20be%20able%20to%20fill%20this,%20resulting%20in%20a%20potential%20%3Ca%20href=%22mailto:https://www.bloombergquint.com/business/abn-amro-exit-threatens-commodity-trader-liquidity-squeeze%22%20target=%22_blank%22%3Eliquidity%20freeze%3C/a%3E%20for%20commodity%20traders.%20Banks%E2%80%99%20revenue%20from%20commodities%20trade%20finance%20%3Ca%20href=%22mailto:https://www.reuters.com/article/commodities-trade-finance-idUSL8N2FF62Q%22%20target=%22_blank%22%3Eslid%2040%25%3C/a%3E%20year-on-year%20to%20$700%20million%20in%20the%20second%20quarter%20of%202020%20according%20to%20consultancy%20firm%20Coalition.%3C/p%3E%3C/div%3E%3C/div%3E%3Cdiv%3E%3Cdiv%3E%3Cp%3ECommodity%20traders%20have%20been%20feeling%20the%20heat%20in%20the%20recent%20past%20on%20account%20of%20volatility%20in%20commodity%20prices%20compounded%20by%20reduced%20trade%20due%20to%20Covid-19.%20The%20global%20agricultural%20merchant%20and%20trading%20giant%20%3Ca%20href=%22https://www.world-grain.com/articles/13447-louis-dreyfus-net-income-falls-38-in-2019%22%20target=%22_blank%22%3ELouis%20Drefyus%20saw%3C/a%3E%20net%20income%20fall%2038%25%20to%20$228%20million%20in%202019.%20Its%20American-headquartered%20peer%20%3Ca%20href=%22https://www.bunge.com/news/bunge-reports-fourth-quarter-and-full-year-2019-results%22%20target=%22_blank%22%3EBunge%20reported%3C/a%3E%20a%20loss%20of%20$1.28%20billion%20for%202019%20against%20a%20profit%20of%20$267%20million%20in%202018.%20The%20British%20multinational%20%3Ca%20href=%22https://www.glencore.com/investors/half-year-results-2020%22%20target=%22_blank%22%3EGlencore%20posted%3C/a%3E%20an%20H1CY20%20loss%20of%20$2.6%20billion.%20Louis%20Dreyfus%E2%80%99%20%3Ca%20href=%22https://in.reuters.com/article/louisdreyfus-credit-suisse-loan/louis-dreyfus-owner-pledged-stake-to-raise-1-billion-credit-suisse-loan-idINKBN1Z5147%22%20target=%22_blank%22%3Eowner%20had%20to%20pledge%3C/a%3E%20her%20majority%20stake%20in%20the%20holding%20company%20LDHBV%20to%20raise%20a%20$1%20billion%20loan%20from%20Credit%20Suisse.%3C/p%3E%3C/div%3E%3C/div%3E%3Cdiv%3E%3Cdiv%3E%3Ch2%3ELoss%20Of%20Trust%3C/h2%3E%3C/div%3E%3C/div%3E%3Cdiv%3E%3Cdiv%3E%3Cp%3EThis%20decision%20by%20banks%20can%20be%20attributed%20to%20a%20certain%20set%20of%20micro%20and%20macro%20factors.%20%E2%80%9CKey%20micro%20factors%20stems%20from%20the%20recent%20sizeable%20defaults%20by%20commodity%20traders%20in%20hubs%20such%20as%20Singapore,%20Dubai,%20and%20Switzerland,%20leading%20to%20a%20general%20collapse%20in%20confidence,%E2%80%9D%20says%20Eric%20Chen,%20an%20ex-banker%20and%20Director%20at%20vCargo%20Cloud%20Pte%20Ltd,%20a%20digital%20services%20provider%20in%20the%20trade%20and%20logistics%20space.%3C/p%3E%3C/div%3E%3C/div%3E%3Cdiv%3E%3Cdiv%3E%3Cp%3ESeveral%20frauds%20have%20been%20unearthed%20in%20the%20last%20few%20months%20%E2%80%93%20Hin%20Leong,%20Phoenix%20Commodities,%20GP%20Global,%20Agritrade,%20and%20ZenRock%20to%20name%20a%20few.%20Hin%20Leong,%20a%20marine%20fuel%20trader,%20has%20confessed%20to%20hiding%20about%20$800%20million%20in%20losses.%2023%20banks%20have%20exposure%20aggregating%20up%20to%20$%203.5%20billion%20to%20Hin%20Leong.%3C/p%3E%3C/div%3E%3C/div%3E%3Cdiv%3E%3Cdiv%3E%3Cp%3EJust%20weeks%20before%20Hin%20Leong%E2%80%99s%20failure,%20Agritrade,%20whose%20businesses%20consist%20of%20palm%20oil%20and%20coal%20mining,%20collapsed%20amid%20allegations%20of%20fraud.%20The%20case%20of%20Hin%20Leong%20shows%20that%20even%20a%20highly%20developed%20legal%20environment%20like%20Singapore%20is%20now%20considered%20difficult%20for%20banks%20to%20recover%20their%20dues.%3C/p%3E%3C/div%3E%3C/div%3E%3Cdiv%3E%3Cdiv%3E%3Ch2%3EHow%20The%20Business%20Has%20Changed%3C/h2%3E%3C/div%3E%3C/div%3E%3Cdiv%3E%3Cdiv%3E%3Cp%3ECommodity%20trade%20finance%20was%20considered%20as%20among%20the%20safest%20businesses%20for%20banks%20at%20one%20point%20in%20time.%3C/p%3E%3C/div%3E%3C/div%3E%3Cdiv%3E%3Cdiv%3E%3Cp%3E%E2%80%9CTrades%20were%20mostly%20on%20a%20pre-sold%20basis,%20backed%20by%20letters%20of%20credit,%20thus%20with%20limited%20credit%20risk.%20These%20then%20increasingly%20moved%20to%20open%20account%20terms,%20exposing%20them%20and%20financing%20banks%20to%20price%20and%20credit%20risks,%E2%80%9D%20says%20Srinivasan%20Govindan,%20a%20senior%20banker%20and%20formerly%20the%20chief%20representative%20of%20Natixis%20in%20India.%3C/p%3E%3C/div%3E%3C/div%3E%3Cdiv%3E%3Cdiv%3E%3Cp%3EMany%20banks%20with%20no%20experience%20in%20the%20commodity%20finance%20business%20have%20entered%20the%20space%20lately%20and%20offered%20unsecured%20and%20cash-flow%20based%20medium-%20to%20long-term%20lending%20facilities.%20As%20many%20of%20these%20traders%20are%20global%20in%20size,%20they%20have%20been%20the%20darlings%20of%20not%20only%20big%20global%20banks%20but%20also%20local%20banks.%3C/p%3E%3C/div%3E%3C/div%3E%3Cdiv%3E%3Cdiv%3E%3Cp%3EGovindan%20adds%20%E2%80%9COver%20the%20years,%20the%20usually%20tightly%20controlled%20and%20monitored,%20commodity%20trade%20financing%20lines%20were%20increasingly%20replaced%20with%20corporate%20lines%20in%20the%20form%20of%20syndicated%20loans,%20revolvers,%20etc.,%20diluting%20the%20rigorous%20structures%20earlier%20employed.%20Low%20equity%20base,%20high%20leverage,%20and%20volatile%20price%20movements%20only%20compounded%20this%20situation.%E2%80%9D%3C/p%3E%3C/div%3E%3C/div%3E%3Cdiv%3E%3Cdiv%3E%3Cp%3EDouble%20financing%20is%20a%20very%20big%20issue%20in%20trade%20and%20commodity%20finance.%20In%20fraudulent%20cases,%20it%20has%20been%20observed%20that%20borrowers%20have%20pledged%20the%20same%20collateral%20or%20inventory%20to%20multiple%20banks%20at%20the%20same%20time.%20The%20absence%20of%20a%20centralised%20database%20of%20collateral%20or%20securities%20registry%20nationally%20as%20well%20as%20globally%20adds%20to%20the%20problem%20of%20lenders.%3C/p%3E%3C/div%3E%3C/div%3E%3Cdiv%3E%3Cdiv%3E%3Cp%3E60%20letters%20of%20credit%20amounting%20to%20$1.5%20billion%20were%20used%20by%20Hin%20Leong%20to%20finance%20cargo%20that%20both%20didn%E2%80%99t%20exist%20or%20was%20pledged%20to%20a%20number%20of%20patrons,%20as%20per%20the%20investigation%20by%20PwC,%20%3Ca%20href=%22https://fintechzoom.com/fintech-news-banking/after-9-billion-credit-hit-banks-seek-trade-finance-overhaul/%22%20target=%22_blank%22%3Ethe%20court-appointed%20managers%3C/a%3E.%3C/p%3E%3C/div%3E%3C/div%3E%3Cdiv%3E%3Cdiv%3E%3Cp%3EEric%20Chen%20further%20says,%20%E2%80%9Cdevelopments%20in%20the%20Basel%20framework%20stand%20to%20reduce%20the%20capital%20relief%20on%20commodity%20trade%20finance,%20making%20it%20less%20attractive%20on%20a%20risk-weighted%20profitability%20basis.%E2%80%9D%3C/p%3E%3C/div%3E%3C/div%3E%3Cdiv%3E%3Cdiv%3E%3Cp%3ETrading%20companies%20operate%20on%20very%20thin%20margins%20of%200-2%25%20and%20some%20have%20a%20very%20opaque%20business%20model,%20which%20potentially%20makes%20it%20easy%20to%20conceal%20losses%20in%20derivative%20assets,%20inventory,%20receivables%20etc.%20One%20wrong%20call%20about%20price%20movements%20can%20erode%20their%20margins%20for%20the%20entire%20year%20according%20to%20the%20head%20of%20risk%20of%20an%20MNC%20bank%20in%20India,%20who%20spoke%20on%20condition%20of%20anonymity.%3C/p%3E%3C/div%3E%3C/div%3E%3Cdiv%3E%3Cdiv%3E%3Cp%3ERegulatory%20changes%20mean%20that%20banks%20have%20to%20now%20charge%20more%20per%20transaction%20to%20clear%20their%20internal%20risk-adjusted%20return%20on%20capital%20employed%20thresholds.%20These%20changes%20have%20also%20tightened%20the%20high%20global%20recovery%20rates%20or%20low%20loss-given%20defaults%20being%20ascribed%20to%20many%20structured%20trade%20transactions%20like%20pre-payments,%20pre-export%20finance,%20thus%20making%20deals%20not%20lucrative%20at%20the%20current%20margins.%3C/p%3E%3C/div%3E%3C/div%3E%3Cdiv%3E%3Cdiv%3E%3Cp%3EThe%20changing%20environment%20amid%20the%20pandemic%20has%20led%20to%20a%20decline%20in%20global%20trade.%20Global%20trade%20is%20forecasted%20to%20decline%20between%2013%25%20and%2032%25%20in%202020,%20as%20per%20the%20U.S.%20Congressional%20Research%20Service%20depending%20on%20the%20depth%20and%20extent%20of%20economic%20downturn.%20This%20will%20impact%20the%20free%20movement%20of%20commodities%20around%20the%20globe.%3C/p%3E%3C/div%3E%3C/div%3E%3Cdiv%3E%3Cdiv%3E%3Ch2%3EImpact%20On%20India%3C/h2%3E%3C/div%3E%3C/div%3E%3Cdiv%3E%3Cdiv%3E%3Cp%3EIndia%20is%20more%20of%20an%20origination%20and%20destination%20market%20and%20less%20of%20a%20trading%20hub.%20Banks%20in%20India%20largely%20take%20a%20corporate%20type%20or%20balance%20sheet%20approach%20to%20financing%20whether%20it%20is%20a%20commodity%20trader%20or%20a%20producer%20and%20such%20defaults%20are%20few%20and%20far%20between.%3C/p%3E%3C/div%3E%3C/div%3E%3Cdiv%3E%3Cdiv%3E%3Cp%3EHowever,%20many%20large%20traders%20have%20their%20subsidiaries%20in%20India,%20and%20banking%20limits%20to%20these%20are%20provided%20on%20the%20back%20of%20a%20corporate%20guarantee%20or%20letter%20of%20comfort%20from%20the%20parent.%20Many%20traders%20have%20global%20limits%20and%20sub-limits%20are%20carved%20out%20of%20these%20for%20their%20Indian%20operations.%20Such%20limits%20enjoyed%20by%20these%20subsidiaries%20from%20MNC%20banks%20in%20India%20could%20get%20impacted,%20more%20so%20in%20case%20of%20a%20global%20review%20of%20limits%20to%20these%20groups.%3C/p%3E%3C/div%3E%3C/div%3E%3Cdiv%3E%3Cdiv%3E%3Cp%3EOver%20the%20years,%20some%20subsidiaries%20of%20large%20traders%20in%20India%20have,%20in%20turn,%20started%20to%20provide%20financing%20support%20to%20small%20producers%20here.%20The%20exit%20or%20reduction%20of%20big%20banks%20from%20the%20trade%20and%20commodity%20finance%20business%20could%20impact%20such%20small%20producers%20and%20result%20in%20temporary%20supply%20chain%20disruptions.%3C/p%3E%3C/div%3E%3C/div%3E%3Cdiv%3E%3Cdiv%3E%3Cp%3EThe%20subsidiaries%20of%20global%20traders%20operating%20out%20of%20India%20and%20tier-2-and-3%20producers%20which%20import%20commodities%20into%20the%20country%20could%20see%20an%20increase%20in%20financing%20costs%20in%20the%20short%20to%20medium%20term.%3C/p%3E%3C/div%3E%3C/div%3E%3Cdiv%3E%3Cdiv%3E%3Cp%3ETo%20sum%20up,%20the%20trade%20and%20commodity%20finance%20business%20could%20see%20a%20major%20overhaul%20globally%20in%20the%20post-Covid%20scenario,%20with%20increased%20import%20and%20export%20financing%20costs,%20supply%20chain%20disruptions,%20higher%20risks,%20and%20consolidation%20of%20players.%3C/p%3E%3C/div%3E%3C/div%3E%3Cdiv%3E%3Cdiv%3E%3Cp%3E%3Cem%3EAmitabh%20Tiwari%20is%20a%20former%20corporate%20banker,%20and%20currently%20a%20political%20strategist%20and%20consultant.%3C/em%3E%3C/p%3E%3C/div%3E%3C/div%3E%3Cdiv%3E%3Cdiv%3E%3Cp%3E%3Cem%3EThe%20views%20expressed%20here%20are%20those%20of%20the%20author%20and%20do%20not%20necessarily%20represent%20the%20views%20of%20BloombergQuint%20or%20its%20editorial%20team.%3C/em%3E%3C/p%3E%3C/div%3E%3C/div%3E%3C/div%3E%3C/div%3E%3Cdiv%3EBloombergQuint%3C/div%3E%3Cdiv%3EMissing%20BloombergQuint's%20WhatsApp%20service?%20Join%20our%20%3Ca%20href=%22https://t.me/bloombergquint%22%20target=%22_blank%22%3ETelegram%20channel%3C/a%3E%20or%20activate%20%3Ca%20href=%22https://www.bloombergquint.com/subscribe-push-notification%22%20target=%22_blank%22%3EWebsite%20Notifications.%3C/a%3E%3C/div%3E%3Cdiv%3EView%20%3Ca%20href=%22https://www.bloombergquint.com/opinion%22%20target=%22_blank%22%3EOpinions%3C/a%3E%20From%20Business%20And%20Policy%20Experts%20On%20BloombergQuint%3C/div%3E%3Cdiv%3E%3Cdiv%3E%3Ca%20href=%22https://www.bloombergquint.com/terms-of-use%23TOC24%22%20target=%22_blank%22%3EDisclaimer%3C/a%3E%3C/div%3E%3C/div%3E%3C/div%3E%3C/div%3E%3C/div%3E%3C/div%3E%3C/div%3E%3C/div%3E%3Cdiv%20id=%22background%22%3E%3Cdiv%20id=%22background_shading%22%3E%3C/div%3E%3C/div%3E%3C/div%3E%3Clink%20rel=%22stylesheet%22%20href=%22https://markups.kdanmobile.com/mymarkup/front/the_components/reformat/style.css%22%20type=%22text/css%22%3E%3C/body%3E

Summary | 10 Annotations
Why Banks Are Exiting Trade And Commodity Finance
2020/08/26 19:38
Many banks are shedding jobs, restructuring or reducing their commodities business to cut risk.
2020/08/26 19:38
Banks have suffered losses to the tune of $9 billion from the $18 trillion commerce finance enterprise
2020/08/26 19:38
Commodity traders have been feeling the heat in the recent past on account of volatility in commodity prices compounded by reduced trade due to Covid-19
2020/08/26 19:39
This decision by banks can be attributed to a certain set of micro and macro factors. “Key micro factors stems from the recent sizeable defaults by commodity traders in hubs such as Singapore, Dubai, and Switzerland, leading to a general collapse in confidence,
2020/08/26 19:39
, has confessed to hiding about $800 million in losse
2020/08/26 19:39
Commodity trade finance was considered as among the safest businesses for banks at one point in time
2020/08/26 19:39
Many banks with no experience in the commodity finance business have entered the space lately and offered unsecured and cash-flow based medium- to long-term lending facilities
2020/08/26 19:40
Regulatory changes mean that banks have to now charge more per transaction to clear their internal risk-adjusted return on capital employed thresholds. These changes have also tightened the high global recovery rates or low loss-given defaults being ascribed to many structured trade transactions like pre-payments, pre-export finance, thus making deals not lucrative at the current margins.
2020/08/26 19:42
The changing environment amid the pandemic has led to a decline in global trade. Global trade is forecasted to decline between 13% and 32% in 2020, as per the U.S. Congressional Research Service depending on the depth and extent of economic downturn.
2020/08/26 19:42