Global definitions in supply chain finance

The Global Supply Chain Forum, established by the International Chamber of Commerce (ICC) and some other associations, has developed standard definitions for techniques of supply chain finance (SCF). The sponsoring associations have recommended their global adoption. These will be useful for finance providers, their clients, investors, legal practitioners, information technology and infrastructure providers, and other associations of professionals and businesses involved with SCF in any way.

The physical supply chain (PSC) is a system of organisations, people, activities, information and resources involved in moving a product or service from seller to buyer, within or across borders. It is the underlying basis of economic functions which give rise to financial requirements and must be supported by financial supply chain (FSC) activities. The latter is the chain of processes, events and activities that provide financial support to PSC participants.

SCF is defined as the use of financing and risk mitigation practises and techniques to optimise the management of working capital and liquidity invested in supply chain processes and transactions. Visibility of underlying trade flows by the finance provider(s) is a necessary component of such financing arrangements. This can be enabled by a technology platform. The inconsistent, even contradictory, language currently in use is diluting the effectiveness of communication in articulating the value proposition around SCF. The purpose of standard definitions is to help remove the lack of clarity when terminology is used in both technical discussion and in broader conversations.

These definitions specifically deal with receivables discounting, forfaiting, factoring and its variations, payables finance, loans or advances against receivables, distributor finance loans or advances against inventory, pre-shipment finance and the nabling framework of bank payment obligations. The forum, in a document, has clearly spelt out  the definition, synonyms, distinctive features, parties, contractual relationships, documentation, security, risk and risk mitigation techniques, transaction illustrations, benefits, asset distribution and variations as applicable for each of these SCF techniques

The standard definitions were drafted by a team of practitioners and domain specialists from a range of organisations located in major markets across the globe. These will evolve and be periodically updated. The growing range of SCF providers and application of technology to SCF solutions will further drive the need to keep up with market developments.
 

ICC has developed many rules to standardise terminologies and practises in international trade. Its International Commercial Terms (Incoterms 2010), Uniform Customs and Practices for Documentary Credits (UCP 600), International Standard Banking Practises for examination of documents under UCP 600 (ISBP 745), Uniform Rules for Demand Guarantees (URDG), Uniform Rules for Forfaiting URF 800), Uniform Rules for Collections (URC 522) and, Uniform Rules for Bank to Bank Reimbursements are accepted by almost all parties dealing in international and even domestic contracts and transactions.

It is near certain that the definitions now developed for techniques in SFC will also gain global acceptance in due course. So, it is necessary for all parties involved in physical and financial supply chains to get familiar with the standard definitions and start adopting these in their contracts and transactions. On its part, the Reserve Bank of India could consider instructing banks, financial institutions and insurance companies to adopt these.  

E-mail: tncrajagopalan@gmail.com