In keeping with the growing clout of China and India among the Asian economies, the Asian Development Bank (ADB) on Tuesday decided to start supporting deals denominated in their local currencies under its Trade Finance Programme (TFP) as intra-regional trade transactions using the renminbi and the rupee are expected to rise.
Announcing its decision in a statement, the Manila-based multilateral lending institution said: “ADB’s board of directors today approved the inclusion of renminbi and Indian rupee in the TFP, which fills market gaps for trade finance by providing guarantees and loans to banks to support trade”.
The ADB pointed out that over 50 per cent of TFP’s portfolio supported intra-regional trade and this move would bolster the programme’s ability to further enhance its support for trade within developing Asia. Hitherto, the TFP which has supported over $10.6 billion in trade since 2009, used to cover only transactions denominated in the US dollar, the Japanese yen and the euro.
Intra-regional trade in Asia in the next 10 years is expected to account for at least half of all foreign trade for Asian countries. At present, 90 per cent of all foreign trade in Asia is settled in U.S. dollars, but this percentage is expected to decline.
According to ADB’s head of TFP Steven Beck, the move to include the Chinese renminbi and the Indian rupee will encourage the use of regional currencies in trade and reduce reliance on the U.S. dollar as a settlement currency, which is in short supply in many countries. “It advances our promotion of trade in the region, which is crucial for boosting job creation and economic growth,” he said.
While the TFP is active in 16 countries, it focuses almost exclusively on taking risk in more challenging markets. The most active markets have been Bangladesh, Vietnam, Pakistan, Sri Lanka and Nepal, where market gaps are proportionally the largest with robust risk management. TFP’s volumes have increased 40 per cent in the first-half of 2012 as compared to the same period of the previous year. The gap for trade finance, the statement said, had been enlarging on account of financial deleveraging, tight credit supply from banks, low appetite for taking risk on many ADB countries of operation and tougher regulatory requirements. As a consequence, ADB decided to extend the TFP, set to expire by the end of 2013, for an indefinite period.