Reducing counterparty risk and increasing sales

The challenge

In China, SGMW receives hundreds of paper-based Bank Acceptance Drafts (BAD) from dealers every month. Whilst these are a commonly used tool in China, a big issue is that many of the BADs that SGMW receive are issued by smaller banks, leaving the company exposed to high-levels of counterparty risk.

With limited options available, SGMW usually holds onto these drafts until maturity. However, should the company’s counterparty risk limits be breached, it will have to discount the BADs – at a significant cost – or refuse further drafts from dealers, limiting further sales.

The company required a solution that would alleviate these issues by reducing the counterparty risk exposure without impacting sales.

The solution

To do this, SGMW collaborated with Standard Chartered Bank (SCB) to develop a tailor-made Committed BAD Discounting solution.

Traditionally, the way to reduce bank counterparty risk is to do BAD discounting or endorse the BAD and transfer to buyer. However, with the Committed BAD discounting solution, SGMW can leverage on the discounting commitment provided by the bank and reduce the acceptance banks risk, meanwhile without adding additional financing cost.

Additionally, this solution facilitates SGMW to boost sales through the effective use of a traditional payment instrument. “BADs continue to be the most widely accepted payment methods in China, especially for the small and medium-sized companies like our dealers,” says Flora Li, Finance Director at SGMW. “However, for big companies like SGMW, we have not been able to accept as many BADs as possible, given our strict internal risk control. With the committed BAD solution, we have more room to accept BADs issued by lower-rated banks, which therefore enhances dealers’ procurement capacity, and helps SGMW to boost sales.”

Best practice and innovation

This unique and innovative solution has benefited SGMW in various ways, including:

• Mitigating counterparty risk.
• Reducing overall financing cost.
• Optimising the dealers’ settlement method.
• Boosting sales.

“We have trillions of BAD transactions per year. Through the solution, SGMW can boost sales without adding on additional counterparty risk on the BAD, and is able to further control counterparty risk with minimal financing cost,” adds Li. “Also, our dealers could have more flexibility to enhance their procurement capacity.”

The solution has set an excellent example of what can be achieved by automotive companies. Moreover, the structure can be easily replicated by corporates in different industries who hold a lot of BADs and aim to reduce financing cost and manage counterparty risk.