7BSP1245 - Report on Trade Finance, Credit Risk, HSBC Policies

This report delves into the realm of trade finance, examining its significance in the modern business environment, particularly for multinational corporations. It defines trade finance as a suite of financial instruments facilitating international transactions and highlights its role in mitigating risks like currency fluctuations and non-payment. The report then explores credit risk, emphasizing its impact on timely financial obligations in trade finance contracts. It outlines various credit risk management techniques, including credit insurance, factoring, and the use of letters of credit. Finally, the report provides an overview of HSBC's credit risk management policies, which include client-by-client approvals, a centralized approval structure, and exposure limits, demonstrating a comprehensive approach to managing financial risks.

Running head: 7BSP1245
7BSP1245
Name of the Student
Name of the University
Author Note

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Table of Contents
Introduction..................................................................................................................................2
Trade Finance...............................................................................................................................2
Credit Risk...................................................................................................................................2
Managing Credit risk...................................................................................................................3
HSBC Policy in managing credit risks........................................................................................3
References....................................................................................................................................4

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Introduction
Many entities tend to operate on a global scale in the modern day business environment.
These are known as the Multinational Corporations. Hence, the financial needs of these entities
change on the basis of the area in which they are operating. This international trade of the entities
brought up the concept of Trade Finance.
Trade Finance
The financial instruments and products used by the multinational corporations and other
entities operating internationally are collectively known as Trade Finance. These instruments
make it much simpler for the businesses to trade and transact with each other more efficiently
(Brandi and Schmitz 2015). The main purpose of trade finance is to act as a facilitator which
provides receivables or payment to the exporter while also acting as a credit mechanism for the
importer. Some of the prominent stakeholders involved in trade finance include Banks, Trade
Finance companies, insurers and exporters and importers. It differs from general finance in the
sense that it is used to protect the buyer against foreign currency exchange fluctuations and non-
payment issues.
Credit Risk
Credit risk is the risk involved in a transaction in which one of the parties to the contract
may be unwilling to meet their obligations in relation to the contract. In case of a contract
dealing with trade finance, this is related to the ability of a counterparty to make the financial
payment on time. The success of a majority of the international trade deals depends on reducing
the credit risk and meeting the obligations in a timely manner (Han 2015). The credit risk
analysis is conducted before entering into a contract with the other party. Managing credit risk

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through a variety of techniques like diversification and hedging is essential in benefiting from an
overseas investment.
Managing Credit risk
One of the primary ways of measuring credit risk in a trade finance related transaction is
to undertake credit insurance. It protects the customers from an open sale in which the payment
is not made by the customer in a timely manner. One of the main benefits of this insurance is that
it allows for increased credit sales without the risk of losses due to non-payment. Another
available option is that of factoring and forfaiting. This allows for the creditor to receive the
funds from a bank in advance and transfer the risk of non-payment and collection of funds to the
banks (Chen, Ribeiro and Chen 2016). The confirmation of the letter of credit is another option
which guarantees the payment to a seller even in case of a default in payment by the bank.
HSBC Policy in managing credit risks
Some of the steps taken by HSBC in managing credit risks include approval on a client-
by-client basis which includes a due diligence for every possible client. Other steps include a
single approval authority structure, corporate counterparty exposure and banks and non-financial
institutions exposures. The exposures mean that the approvals are provided by the local
authorities delegated by the bank for a particular region (Jun 2018).

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References
Brandi, C. and Schmitz, B., 2015. Financing global development: The potential of trade
finance (No. 10/2015). Briefing Paper.
Chen, N., Ribeiro, B. and Chen, A., 2016. Financial credit risk assessment: a recent
review. Artificial Intelligence Review, 45(1), pp.1-23.
Han, P., 2015. Credit risk management of commercial banks. Journal of Business Administration
Research, 4(1), p.8.
Jun, F., 2018. Study of Relationship Between Credit Risk (Non-Performing Finance Ratio) and
Internal and External Factors in HSBC Bank. Available at SSRN 3301111.