Risk Management For China Commercial Banks’ Supply Chain Financing Programs

In recent years, small and medium enterprises(“SMEs”) have been an integral part of China’s economic landscape, and contributed significantly toward China’s economic development. To stimulate the growth of SMEs, the government has introduced a number of preferential policies and incentives. However, access to financing continues to pose a challenge for many SMEs.There are a number of different ways for businesses to obtain financing, including bank loans, bond financing, equity financing, leasing and others. Among these instruments, bank loans comprise the primary source of capital for most businesses.However, SME’s are faced with a host of problems when applying for loans: stringent underwriting standards by the banks, cumbersome application and approval processes,high costs, and even navigating internal issues such as underdeveloped financial systems and controls, poor management, and limited resources to drive innovation.Thus, solving the problem of providing financing to SMEs will greatly impact China’s economic development, and against this backdrop, supply chain financing has emerged as an alternative form of capital.In recent years, the commercial banks have introduced a variety of supply chain financial products, which, to a certain extent, have addressed the problem of SME financing, and also opened up new lines of business for the banks themselves. In the current financing model, banks assess an entire supply chain, the quality of its operations and management, and the creditworthiness of the core business model, then extend the financial products to SMEs along the entire supply chain. Not only do such financial services remove the bottleneck on obtaining funding for SMEs, they also enable businesses to achieve their procurement and sales optimization strategies. At the same time, the commercial banks have the opportunity to expand their business lines, grow their customer base and deposits, while generating considerable income from serving as an intermediary in the market.However, from the banks’ perspective, supply chain financing also poses higher operational risks than the more traditional financing models, and tend to result in higher default rates than ordinary corporate loans. Therefore, appropriate risk management is essential, and will ensure that commercial banks chart the right course and employ the right strategies as they scale their supply chain financing businesses.In the highly competitive supply chain financing market, risk management will play an important role in determining whether a bank will survive and gain market share,and as such the commercial banking industry is bound to revolutionize many aspects of their risk management programs.This paper presents the key factors that influence supply chain financing risk, by looking at the product’s significance to a commercial bank’s business, its various forms and their respective features; through case analysis, common risks faced by the commercial banks in extending such a product; and last not but not least, proposals for specific means of managing supply chain financing risk, with the goal of promoting practices that could facilitate a smoothly-functioning supply chain financing market.