Real pressure on risk pricing

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01 July 2005

At a time when margins are being squeezed across the emerging markets, trade finance lending in Asia continues to offer attractive returns. But the region is not without its risks, and the choice of mitigants is often bewildering. Steve Garton looks at a sample of the products available to the lending community and asks whether pricing reflects their performance.

"I'll never forget the discussion," says one Singapore-based trade banker. "The issuing bank was refusing to pay on an LC, claiming that the documentation we had submitted contained discrepancies. We were confident that the costs, goods, and shipping details all matched, and when we asked them to show us the problem, they told us that the dates on the documents were different. It was unbelievable. One was an invoice; one was a bill of lading. Of course they didn't match."

It is no exaggeration to say that most trade bankers across Asia can tell a similar story, and it shows that even the trusted letter of credit has its weaknesses. If this is true of a tool that has been the bread and butter of trade finance for centuries, then what of the more sophisticated risk products? Are they worth the expense, or would lenders be better off...

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