Credit Risk Of Banks In Supply Chain Finance

One interesting dilemma, even greater if seen in worldwide, has long rooted in commercial banking activities that is banks tend to give credits to companies of larger market share, better properties and better functioned operations against risk management mechanisms and principles according to Basel Accords. On the other hand, it is widely recognized that medium and small companies have greater and more urgent financing needs are usually set aside if those companies are put under banks loan granting criteria. Since companies of less market share, less properties and less reputed are labeled as’higher risk’ companies, so that banks are less likely to grant loans to those companies smoothly even though smaller companies have greater demand. That is the financing difficulty of the small-and-medium-sized enterprises. However a creative financing plan named’supply chain finance’help banks step out of this long rooted dilemma in recent years, and market responses this newly emerged financing plan well and becomes more and more popular. This new financing plan requires financial institutions and logistic companies much more intensive corporations so that both financial institutions and logistic companies can service the whole trading chain while banks do clearing and financing job and logistic companies help with transportation. Though differences turned out while supply chain financing applied in various scenarios credits are introduce into small and medium companies which are of their best needs. In other words, both banks and companies are winners in this newly financing plan. Since banks are able to step into a larger market earns more profits while inject liquidity into small and medium companies. In a larger sense banks, by this newly financing plan, not only inject liquidity into the whole economic chain also help manage the economic chain suffer from system risks. Admitted benefits supply chain finance brings along it is a double edged sword anyway, as well it seriously contradicts to principles and applications that commercial banking activities are holding on.This paper mainly discusses the origin of contradictions between supply chain finance and commercial banking. Let’s first call this contradiction’supply chain finance paradox’-questions, like what kind influences supply chain finance brings about to loan grant? How financial innovations are introduced to help manage risks approving loans to medium and small companies? Supply chain finance paradox is mainly about these four questions:first of all, why supply chain finance impacts traditional commercial banking activities; Secondly, what potential risks banks are facing if approving credits based on supply chain finance mode, and what are these risk factors? Thirdly, how banks recognize risks rising from supply chain finance? Finally, what makes banks’evaluations used in measuring potential risks and what risk management laws banks are able to rely on and how these risks can be prevented?)On the credit risk problem concerning the business of supply chain credit offering, this paper has studied the problem in a frame of principle-agent relationship that contains many sections and subjects on a perspective of global economy. Besides the presentation of the theme and the fundamental conclusion, there are mainly five parts in this paper. In the first part, it has reviewed the existing related research, clarified the current situation of research in this field, which has laid sound foundation for the accurate position of the study. In the second part, it has elaborated on the default risk, moral risk and country risk, according to the key point in the whole chain. In the third part, based on the recognition of the risks, it has made further efforts on the methods and measuring indicators about the risks. In the fourth part, the author has analyzed the concrete methods of risk management, for instance, the avoidance of the risk, the sharing of the risk and the adjustment of the risk etc. Besides the traditional ways of risk control, there are some special mechanisms to deal with the risks involving in the supply chain credit offering. In the final part, the paper has taken advantage of the real cases in this field, analyzing the risks engaged in. we can see clearly how the commercial banks do the reorganization, estimation and management of the risks in the real operation.After the detailed study, there are some conclusions here. Firstly, in the principle-agent chain of supply chain credit offering business, the credit risks are consisted of default risk, moral risk and country risk. The default risk attributes to the situation that the credit-accepting corporation doesn’t complete its obligation arranged in the contract due to some reasons, which increases the possibility of loss in the bank part. The moral risk is used to describe the circumstance that the credit-accepting corporation has more information about itself than the commercial banks, while the banks have drawbacks in the supervision and stimulation process, the hiding act of the enterprises can bring much more uncertainty to the banks. The country risk is the indicator to measure the risk-related factors overseas. Secondly, in order to manage the risks, some valuation methods and measuring indicators consisting both the traditional ones and special ones are used by the commercial banks. Those special methods and indicators make up the deficiency of the traditional ones, diminishing the whole risks faced by the banks. Thirdly, the commercial banks abide by the avoidance principle, dispersing principle, process control principle, transferring principle and compensation principle etc. Leading by these principles, the banks can testify the entrance condition of the financing subject and object, analyze the related industry and manage the risks effectively and generally.Based on my knowledge on the existing research and the experience in the real operation, the innovation of this paper is embodied in the following aspects: Firstly, the brand-new visual angle. All of the existing research in this field is based on the closed economy. This paper choose to study the theme on global perspective because of the prosperous development of trade, financing and invest activities. This new perspective is prospective. Secondly, the new risk recognizing and the new measurement of risk. The corporations involved in this business have contract relationship with each other, which is a new source of risk in the operation. Under these circumstances, the default risk appears in the form of the violation of the agreed contract. The moral risk is defined as a result of the asymmetric information. In the open economy, the risks originated from the oversea are called the country risk. Based on the above point of view, there are new definitions of default risk, moral risk and country risk in this paper. And identified three elements of the concept, proposed a new way to measure risk, make up the country risk in the supply chain finance, making research more complete. Thirdly, based on a large number of commercial banks financial risk management case and supply chain financial practice, it has a strong practical significance to commercial banks to develop financial services and risk identification and control. To sum up, there is a wide range of aspects within supply chain finance since that is an innovative banking activity without much statistical data in practice as well as much discussion on paper, therefore, significant discussion based this paper is welcome.Top among those discussions is further research on system risks any given country has to make to hedge system risks. Though supply chain finance has not information generated from foreign companies, globalization makes no country an exemption if supply chain finance activities are conducted within this country. Secondly, how much can commercial insurance help manage these system risks? Bothe companies and banks are information asymmetry sides to each other, a mutual incentive mechanism if is introduced is necessary seen from banks’aspects, it is still underestimation however. Thirdly, there is a core company within any supply chain finance yet in most scenarios this core falls short. If this core company within a supply chain does not exist, how banks apply some other risk management measures to guarantee their own benefits. This requires further attention and efforts to help with both medium and small companies and banks.