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					          Trade Credit in Japan:
      Relationship with Bank Loans


                November 2003
                 Iichiro Uesugi
Research Institute of Economy, Trade and Industry
                     and METI


                                                1
            Questions to be answered


   How is trade credit used in Japan ?
       A loan a supplier extends to its customers upon product
       sales
       Classified as a trade payable/receivable
       Involves closer ties with business transactions than
       bank loans do

   Is there substitutability between trade credit and
    bank loans ?

                                                             2
                                                                Trade credit use in Japan

                                               Liabilities/ Asset Ratio                                                                   Trade Payable/ Asset Ratio
                                              (by number of employees)                                                                           (by industry)

                                                                                                                                                                                      30.4          301-
                          -20                                                                                                                                             25.4
                                            27.1                       39.8          3.6                           construction                                                                     101-300
                                                                                                                                                                21.4
                                                                                                                                                             19.2                                   21-100
                                                                                                                                                                                                    -20 employee
number of employees




                                                                                                                                                              19.6
                      21-100           21.8                    29.6            8.8                                                                          18.5
                                                                                                                  manufacturing
                                                                                                                                                             19.2
                                                                                                                                                            18.1


                                                                                                                                                                    22.6
                      101-300          20.6              20.5           16.1                                                                                                                 35.0
                                                                                                                      wholesale
                                                                                                                                                                                                    38.9
                                                                                                                                                                                                     40.0
                                                                                           loan(short)
                                                                                           loan(long)                                                14.1
                         301-        11.9     12.3              12.5                       trade payable                                                    17.7
                                                                                                                          retail
                                                                                                                                                             19.0
                                                                                           capital                                                                        25.5

                                0%      10%        20%   30%     40%     50%   60%   70%    80%      90%   100%
                                                                                                                                   0           10           20        %          30                 40         50
                                     Financial Statements Statistics of Corporations                                                   Survey of Financial Environment (Small and                                  3
                                     (Ministry of Finance)                                                                             Medium Enterprises Agency)
         Data for analysis in Japan
   The Survey of Financial Environment (SFE) by
    Small and Medium Enterprises Agency of Japan

   Years: 2001 and 2002
   Number of observations : 7,656 (2001) and
    8,446 (2002) out of 15,000--4,065 firms appear
    in both years
   Ratio of small and medium enterprises: 85.1%
   Recently available for research use

                                                     4
               In praise of the SFE dataset
   Includes not only balance sheet but non-balance sheet
    items--similar to the U.S. Survey of Small Business Finances
    (SSBF)
     (1)   Highest short-term interest rate paid within the year,
     (2)   provision of collateral, (3) personal or government backed guarantee,
     (4)   type of main bank
     (5)   requests to accept an interest rate increase, etc.

   Contains a sizable number of small and medium enterprises

   Can be a panel, while U.S. SSBF is for cross sectional
    analysis only
     SFE can trace changes of a firm’s behavior between two years.


                                                                                   5
            Analysis of trade credit using SFE

   See the effect of idiosyncratic changes of a firm’s
    environment on trade credit, bank loans and other credit or
    loan conditions.

   Fluctuations of corporate ratings and sales are employed.

   We first use the entire sample and then divide it by main
    bank type, collateral provision and ratings level
                                      Change in the liability composition
                                      (Trade credit vs. Bank loan)
     changes in ratings and sales
                                      Change in other credit conditions
                                      (Interest rate, collateral provision,
                                      pressure from main bank, etc.)
                                                                              6
                                                                             Corporate ratings
              In Japan, several private credit research companies produce ratings for firms
               based on credit research and interviews
              We use ratings by Tokyo Shoko Research, Ltd.




                                                                                                                         1500
                                                            440
400




                                                         379
                                                                370
                                                                             358                                                                                                        1218

                                                                  324
300




                                                      296




                                                                                                                         1000
                                                    275               272
                                                                                                             Frequency

                                                                           217
                                                                                 198
200




                                                                                                                            500


                                                127                                                                                                                                    409
                                                                                                                                                                                     409
                                                                                   114
100




                                                                                                                                                                                327              305
                                               77
                                                                                                                                                                                                   200
                                          42                                                                                                                                  166
                                                                                       38                                                                                   137                      132
                                     28                                                     23
                                20                                                               15                                                                    57 66                            54
                           10                                                                         7 5 4 1                                                     33                                         20 23 11 7 2 3 2
               1   1   2 5                                                                                                            1     1 1 3 2 2 8 6 9 16 18
      0




                                                                                                                                  0




          20                    40                                    60                                80                            -20                   -10                              0                          10
                                                      ratings                                                                                                           d(ratings)
                                                                                                                                                                                                                                7
            Relationship between Corporate Ratings and Liabilities
                               (entire sample)


                 first               second              third           fourth
Quartiles
                                                                                          Avg.
Change in                                                                Larger than or
                 Less than -2        Less than 0         Less than +1
ratings                                                                  equal to +1
number of
                            853                    818            1218              760     3649
samples
Total assets               4392               4229                4213             3418     4092
d(trade
                            -96                -75                 -62              -27      -65
payable)
d(loans)                        -9             -58                 -35              -44      -36
d(short-term
                           +25                     -16              +2              -17          -1
loans)
d(long-term
                            -34                    -43             -38              -27      -36
loans)
*Unit is in million yen.                                                                              8
         Relationship between Ratings and Liabilities
    3
                       (entire sample)
                   +2.57                                       d(trade payable/total asset)

                                                               d (loans/total asset)
    2
                                                               d(short-term loans/total
                                +0.98                          asset)
    1                                                          d(long-term loans/total asset)


                                                       +0.37
    0
%




           first              second               third                      fourth

                                                                                   -0.7
    -1

                                                   -1.07
                               -1.34                                          -1.55
    -2

          -2.04
    -3
                                        Quartile

                     ratings drop                     ratings rise
                                                                                                9
       Relationship between Ratings and Non-Balance Sheet Items
                            (entire sample)
quartile                           first            second            third            fourth           Avg.
number of (second)
                                           2.452           2.452              2.186          2.050           2.286
regional banks
d(highest short-term
                                   +0.091%           +0.165%          +0.037%            -0.014% +0.068%
interest rate)
Ratio of firms with
request for higher                         0.229           0.181              0.171          0.194           0.194
interest rate
ratio of firms newly
                                           0.048            0.055             0.044            0.052         0.049
providing collateral
---- personal guarantee                    0.142            0.126             0.125            0.127         0.130
---- government backed
                                           0.058            0.079             0.066            0.066         0.067
guarantee
Change in length of
                                           1.969            1.980             1.956            1.940         1.961
payment terms
*Change in length of payment terms is the average of 1(=shorter than previous year), 2(=unchanged), and 3(=longer). 10
              Relationship between Ratings and Liabilities
                (with/without collateral or guarantee)
    5
            +4.07
    4
                                                   d (trade payable/total asset)*
    3
                                                   d (loans/total asset)*
                                                   d (trade payable/total asset)**
    2                                              d (loans/total asset)**
           +1.32               +1.08
    1
                                                   +0.27
%




                              -0.24
    0
            first            second               third-0.39             fourth
    -1                                                                       -0.95

    -2


    -3
                                                                           -2.93
    -4
                                       Quartile

* Real lines are for firms whose bank loan is backed by government guarantee.
** Dotted lines are for firms whose bank loan is not backed by collateral or
                                                                                     11
   guarantee.
       Adjusting for transaction motive for trade credit
    Substitution between trade credit and loans

    However, decline of trade credit is largely due to reduction of purchase
     since transaction demand is one of the motives for trade credit.

    Suppliers may be eager to extend credit to distressed firms even
     though they are forced to cut trade credit due to purchase drop.

    To measure “eagerness,” we have (growth rate of trade payable) –
     (growth rate of purchase amount) adjusting for transaction motive.

    Relationship between purchase amount and trade payable
    (trade payable outstanding) is proportional to (purchase amount) * (ratio
    of credit on account) * (length of trade credit payment)                    12
        Growth Rate of Loans, Trade Payable, and Trade Payable
        Adjusted for Purchase Amount


quartile               first         second       third            fourth       Avg.
Trade payable (incl.       -31.69%      -12.84%           -5.05%       +4.62%    -11.32%
transaction demand)
Purchase amount            -33.09%       -8.58%       +1.74%         +18.64%      -5.33%
Trade payable (excl.      +1.40%        -4.26%       -6.80%          -14.02%      -5.99%
purchase amount)
Loans                      -3.25%       -6.34%       -4.86%           -6.69%      -5.83%




                                                                                       13
                         Summary
   Trade payable and loans are substitutes
    Trade payable declines in response to deteriorating ratings or sales--
    suppliers are quick to distance themselves from bad businesses
    In contrast, loans gain a larger share even without collaterals or guarantees-
    -financial institutions respond slowly to changes in the business environment

   Trade payable adjusted for purchases gives some
    qualifications
    Adjusted trade payable responds positively to a ratings or sales drop
    “Eagerness to extend credit” may be similar between suppliers and financial
    institutions.

   Further analysis is needed
    Decent econometric model, not just descriptive statistics
    Impact on the real economy, such as employment and investment
    Role of large trade corporations (Shosha)
                                                                                14

				
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