HSBC says blockchain could ease small firms’ financing woes, with Greater Bay Area key to success
- Bank says it recently completed the world’s first yuan-denominated letter of credit blockchain transaction
- Quick exchange of information could make letters of credit more attractive, open more financing to smaller firms, HSBC’s head of trade for Asia says
A broader adoption of blockchain technology could open up more financing for small and medium-sized businesses seeking to export goods, particularly in the Greater Bay Area, according to HSBC’s head of global trade for Asia.
Ajay Sharma, regional head of global trade and receivables finance, HSBC Asia-Pacific, said obtaining letters of credit, in which banks guarantee payments in a transaction, has been difficult for small businesses in the past. A lot of paper had to be exchanged between parties and smaller companies, and if they missed something, they would often have to start the process all over again, which slowed transactions.
About 1.2 million letters of credit valued at US$750 billion were issued in and out of China last year, HSBC said, citing data from global financial messaging provider Society for Worldwide Interbank Financial Telecommunication (Swift). Blockchain, by making documents available electronically to the parties in a transaction and their lenders, has the potential of speeding up the process of issuing letters of credit and opening trade finance to an even larger audience.
“As it is more accepted over time, across the world, it will reduce the complexity and the bad name that letters of credit have gotten as a very difficult instrument to use,” Sharma said. “Letters of credit permitted small companies to go to the banks and say: ‘I’ve got a letter of credit. I’m going to get paid after 60 or 90 days. You know I’ll get the money after it is accepted, so could you finance me.’ Because people are not using letters of credit [as much] … it became more difficult for [small and medium enterprises] to get financing. If it becomes more easy to get letters of credit, you might actually see volumes go back up. It is an easier financing tool for some of the smaller companies we have.”
His comments came as HSBC said on Tuesday that it recently completed the world’s first yuan-denominated blockchain letter of credit transaction involving a shipment of raw materials between Hong Kong’s MTC Electronic Company and its Shenzhen-based parent firm, both in the Greater Bay Area region that links Hong Kong, Macau and nine Pearl River Delta cities.