Tougher EU rules push more supply chain debt into default

The banks that grease Europe’s supply chains face a spike in bad loans as the region’s top regulator introduces tougher standards.

The rules could classify 15% to 20% of receivables for which factoring firms bear the risk as defaulted, said Diego Tavecchia, an official at the EU Federation for the Factoring and Commercial Finance Industry. That equates to as much as €25.5bn in bad loans, he said.

Supply chain finance firms pay a company’s suppliers the value of their outstanding invoices minus a discount. The suppliers get their money faster while the lenders earn a relatively safe return when the invoice is paid.

Starting this year, the European Banking Authority will hold lenders in the region to a common definition of default after finding big differences in how they deal with one of the most fundamental issues in banking. While Tavecchia says the industry has sufficient capital to deal with the fallout, he warned that lenders may cut off some companies from funding unless there are last-minute changes to the rules.

The EBA’s new framework states that receivables booked on a firm’s balance sheet should be considered technically past due after 30 days. That’s a problem for supply-chain finance firms because big companies often pay their bills late.

Tavecchia says the lobby’s biggest worry is how banks deal with “contagion” from the technical defaults in supply-chain finance to other businesses.

“Our concern is that the banks could stop their factoring units from purchasing receivables of those debtors in order to avoid harming the relationship,” Tavecchia said. “That could cut suppliers off from financing.”

The lobby group has asked the EBA to extend the grace period for late payments to 90 days, saying it would reduce the impact on the financing firms by 75%.

Source: Bloomberg

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