India is probably a unique market in the evolution of its banking cycle. On one hand, we have the most advanced tech stacks and product propositions for advanced payments and settlements with money being transferred in a matter of seconds. On the other hand, we have millions of small and medium enterprises who are starved for credit and this problem remains unresolved to a large extent.
While regulators, the government, lenders and more recently Fintech platforms have tried to crack the market, the holy grail seems to be elusive in terms of affordable and seamless credit reaching the small and medium enterprises. Even for those SMEs which form a part of the supply chain ecosystem of Corporate India, a large part of the network has got a chocked working capital.
Partly the problem seems to stem from the way credit is assessed in the Indian context and other documentary requirements that are envisaged from lenders due to regulatory constraints to create a borrower/lender relationship in the eco-system leading to a high cost to serve structure. While there have been baby steps towards resolving this by the introduction of new products like factoring and new platforms like the TREDS exchanges, still the barrier to access credit largely remains in India.
Many issues impede the flow of credit SMEs including sketchy data, intent & capacity framework, collaterals requirements, documentation and a one size fits all approach to supply chain finance. Is there a way to scale up supply chain finance in India? Yes, we realize this and have started to think and act a little differently.
Redefine the risk return framework
The understanding that supply chain finance is an anchor led model with specific end-use of funds against a transactional document, should mitigate the risk to a large extent. Underwriting models should give higher weightage to these parameters than anything else. Against unsecured lending at higher interest rates, the participants under the program should get the benefits of a larger corporate being the counterparty to these transactions. Many firms are now reassessing their supply-chain strategies and footprints to make them more resilient to any kind of disruption.
The data ask should be commensurate to the business being undertaken. The lesser data ask and the ability to triangulate data at the lender’s end would have a far higher conversion ratio with higher scalable programs. A simple bank statement/GST analysis would help triangulate the data and provide insights. Lenders need to invest more to build models around easily available data to aid decision making.
Simplification and faster turn-around time is the need of the hour, and the most important part of the business to simplify is “documentation”. A long 100 pager borrowing documentation will not serve the purpose and will not have the intended effect. Systematic hassle-free documentation helps to fasten the process both for the – lenders and borrowers.
If a business must scale, it has to operate within the frameworks of scalability. Any business which has parts of it offline and online will delay or act as an impediment to scale. Today tools and solutions are available, helping anyone who wants to lend, an end to end solution right from KYC, Pre-sanction, Post-sanction documents digitally to repayments and recon. Any company must accommodate end-to-end digital encryption on the platform which in return helps corporate onboardings within 24 hours. These help to expand the access of credit to the lower tier of suppliers & customers and reach to the hinterland of India.
Compete and collaborate
The existing competition is for a smaller pie where everyone is comfortable. For example, currently, the automotive industry occupies a lion’s share of ~50% of supply chain finance programs of almost all lenders offering such solutions.
Some ways of collaboration can be like extending these solutions to newer industries, extending access of regional lenders to national programs of large corporates in their regions, bringing the mid-corporate segment into the ambit of such programs, getting industry-specific programs placed with such industry-specific lenders like agriculture & farm mechanization, consumer goods, green businesses etc.
Though the regulators have also helped solve some of the problems via the new TREDS framework, Factoring Act and other enablers like Video KYC, there is a lot to be done within the supply chain system. Some amount of agility has come from various Fintechs and service providers, helping with various parts of the solution independently, there has been no concentrated effort to attack the problem from all fronts.
Looking at the current business volumes of all players including traditional lenders and new-age Fintech platforms, we seemed to have only scratched the surface. A player who can help solve these multiple problems has a shot at the blue sky for capturing a large market share in supply chain finance in India.
This article has been authored by Shagun Jain, Head of Supply Chain Finance Platform – CredAvenue