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2015/FDM1/009 Session: 3

Secured Transactions Reform, Financial Inclusion and Regional Integration

Purpose: Information

Submitted by: International Finance Corporation

Finance and Central Bank Deputies’ MeetingTagaytay, Philippines

5-6 March 2015

Secured Transactions Reform, Financial Inclusion and Regional Integration Jinchang Lai Principal Operations Offer, and Lead for Financial Infrastructure, East Asia & Pacific, Finance & Markets, World Bank Group APEC Finance and Central Bank Deputies Meeting, Tagaytay, Philippines, March 5-6, 2015

Key Questions to Ask in an Economy

• How much commercial credits are secured? • Can all the secured commercial lending be based

on real estates (immovables)? • What will be the consequences if credits are

overwhelmingly based on real estates? • What are the benefits of lending against movable

assets (movables finance)? • How to make lenders use more movable assets

(movables)?

Benefits of Movables Finance

•  Movable assets are widely available, and scalable •  The size of movable assets available is tied to the operations

of a borrowing business -- a key information mechanism for the lenders

•  Movables are scalable with financing availability -- a key incentive structuring mechanism

•  Movables finance can often be set up with on-going and revolving arrangements -- and now increasingly on electronic platforms -- and can have automatic enforcement mechanisms in case of borrower default, resulting in transaction cost advantages

•  Experienced lenders see movables financing structures as automatic risk control mechanisms

Objectives of Secured Transactions Reform

Elements of Building up a Movables Finance Market

•  A clear, effective and efficient secured transactions legal framework (law, and judicial effectiveness)

•  A central, online and notice-based Registry covering all movables security interests

•  An active lending industry competent in movables finance •  Supportive banking regulations and supervisory practice ü  Including a friendly environment for the Non-Deposit-Taking Lenders

(NDTLs) to operate •  Efficient and reliable support services (collateral

management companies, credit enhancers, insurance providers, etc.)

•  Discerning borrowers who understand the movables financing mechanisms

•  Electronic financing platforms linking up value chain actors

Features of a Good Secured Transactions Law

Examples of Reform (I)

• Vietnam: ü  Started in 2005-06 ü  A series of Decrees and Circulars issued to improve the

secured transactions legal environment and registry ü  Being consolidated into a revised Civil Code ü  An on-line Registry put into operations in 2012 ü  Lenders have started to use movable assets ü  About a dozen collateral management companies (CMCs)

have emerged ü  In the year of 2014, 186,290 registrations (meaning 186,290

loans) and 398,622 searches in the NRAST Registry

Examples of Reform (II)

• China: ü  Started in 2003 ü  A ground-breaking Property Law approved in 2007 ü  An online Registry created in 2007 ü  Lenders have been rather innovative in rolling out movables

finance products ü  The industry has grown by double digits ever since; annual

disbursements about USD 3.0 trillion ü  About 1100 CMCs; and the collateral management industry is

being formalized ü  Various electronic finance platforms have emerged ü  In the year of 2014, 417,170 registrations and 1,134,901

searches in the CRC Registry (receivables and leasing finance only)

Examples of Reform (III)

• Mexico: ü  Started legal reforms in earlier years (2000-03) ü  The Movable Property Collateral Registry started operations in

October 2010 ü  Total number of registrations reached about 120,000 by

mid-2012; about 40% of assets used are agri collaterals ü  NAFIN set up an electronic accounts receivable financing

platform -- a multi-lender platform Ø  By mid-2013, 53 lending institutions participated, about 10,000

transactions for USD 80 million per day; cumulatively, 1.7 million transactions for USD 86 billion

Ø  Mexican MOF has played an admirable role -- by mandating all government agencies and state-owned enterprises to participate in the platform

Ø  A great example for other APEC MOFs!

Relevance for APEC Priorities

•  Most APEC economies still need to seriously reform (see Annex); and to make greater efforts to develop a dynamic movables finance market

•  Relevance for the selected themes: ü Financial Inclusion: Is there an economy which has excellent SME

Finance (not Microfinance), but dominated by immovables finance or unsecured lending?

ü Financial Resiliency: In times of financial crisis, deposit-taking lenders tend to cut back their lending under conventional methodologies; but asset-based lending (ABL) tend to thrive, filling in the gaps Ø  ABL is a tightly controlled credit methodology; and its loan amount is calibrated to the

availability of eligible receivables and inventories ü Financial Integration: Cross-border trade and investment is very much

driven by Trade & Supply Chain Finance, which relies on accounts receivables and the movements of inventories; no modern secured financing system, little Trade & Supply Chain Finance

Thank You !

The views and judgments of this presentation are those of the author. The conclusions and judgments contained herein should not be attributed to and do not necessarily reflect the views of the World Bank or IFC, or their management and Board of Directors, or the countries they represent. The author, by means of this document, is not rendering any professional advice or service, and shall not be responsible for any loss sustained by any person who relies on this presentation as a substitute for professional advice or service.

Annex: Secured Transactions Legal Rights -- Doing Business Scores for APEC Economies (I)

Australia 1 1 1 1 1 1 1 1 1 1 10Brunei  Darussalam 0 1 1 1 1 0 0 0 0 0 4Canada 1 1 1 1 1 0 1 1 0 1 8Chile 0 0 1 1 1 1 0 0 0 0 4China 0 0 1 0 1 0 0 0 1 0 3Hong  Kong,  China 0 1 1 1 1 0 0 0 1 1 6Indonesia 0 1 0 1 1 0 0 0 0 0 3Japan 0 1 0 0 1 0 0 0 1 1 4Korea 0 0 0 1 1 1 0 1 0 1 5Malaysia 0 1 1 1 1 0 0 0 1 1 6Mexico 1 0 1 0 1 1 1 1 1 1 7

Indicators Economy  Total

1 2 3 4 5 6 7 8 9 10

Annex: Secured Transactions Legal Rights -- Doing Business Scores for APEC Economies (II)

Indicators Economy  Total

1 2 3 4 5 6 7 8 9 10

New  Zealand 1 1 1 1 1 1 1 1 1 1 10Peru 1 1 1 1 1 1 1 0 0 1 8Philippines 0 0 0 0 0 0 0 0 1 1 2PNG 0 1 1 0 1 0 0 0 0 0 3Russia 0 0 0 0 1 0 0 0 1 1 3Singapore 0 1 1 1 1 0 0 1 1 1 7Thailand 0 0 0 0 1 0 0 0 1 0 2US 1 1 1 1 1 0 1 1 1 1 9Vietnam 1 1 1 0 1 1 0 0 0 1 6Indicator  Total 7 13 14 12 19 7 6 7 12 14 111

Source: Doing Business 2015, World Bank Group. Note: Indicator numbering corresponds to the descriptions of indicators in a previous slide.