How Innovative Trade Finance Structures Can Remedy the Bad Loan Portfolios of Banks

Image of a smiling bank manager with customer
A smiling bank manager with customer

Your social media profile says a lot about you. Who you're friends with, where you work or go to school, and there might be a picture or two you don't want the world to see.

If we as people want to make it as professionals then we need to monitor what goes into our profile and weed out unprofessional material, which could potentially damage that reputation.

The same is true for financial institutions. They need to pride themselves with a friendly profile to represent the values of the institution. We have Facebook profiles and banks have loan portfolios.

A financial institution is only as strong as its profitability, capital strength, and asset quality. 

However, poorly managed portfolios can have negative effects for the bank's image and credit worthiness.

This guide will help you understand a new remedy to bad loan portfolios.

What Are Loan Portfolios?

image of a bank manager approving a loan
Bank manager approving a Loan

Banks rely in great part on their ability to provide loans to people. Lending is a crucial part of the prosperity of financial institutions. Loan portfolios are loans held for repayment and a great asset and key factor for the revenue of banks.

The value of a loan portfolio depends on the principal and interest owed, and the credit worthiness of the loan.

They can also bring great risk to the banks economy if not managed properly. Loan portfolios must go through annual audits to access the risks and identify control breaches.

What Are Trade Finance Structures?

Officer counting cash
What is structured trade finance?

Structured Trade Finance (STF) is a type of debt finance. This type of finance route is used as an alternative to lending.

Developing countries use this type of finance in relation to cross border transactions. The goal is to promote trade by using non-standard security.

It's commonly known as a commodity loan. What makes STF loans appealing to borrowers is because the strength of the transaction is not followed as closely as a typical loan.

The focus of this loan is the cash flows as a result of trade. Also, the transactions aren't reflected in the balance sheet, which means it helps with the flexibility of the credit terms with the exporters.

How to Combine Both

Since STF is a type of debt finance, and an alternative to lending, it registers differently on the record books. This is a solution for many bank portfolios because the loan terms aren't as closely monitored.

The cash flow is what shows on this type of loan, and the interest owed and credit worthiness is more lenient. Due to the trade in the transactions, the jurisdictions are also specific to the country where the trade is taking place.

Banks who want to clean up a portfolio can benefit from this type of loan because the cash flow will weight more than the interest owed on the loan. If you have any more questions on how STF can remedy a poorly managed loan portfolio is always a good idea to consult finance advisory.

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