The global supply chain market is not unknown to the benefits of supply chain finance (SCF) solutions, however, the Indian industry is still at a nascent stage of adopting such solutions. SCF is especially uncommon in the MSME and agricultural sectors, although the bigger industry players have been leveraging it to enhance their capital supply for quite some time now. With this article, we try to look at the expanse, scope and transformation of SCF in India, as experts from SCF solutions providers pitch in with their inputs.
As per a report by Arthur D Little & CII, India’s supply chain costs account for 14% (vis-a-vis global 8%), thus creating a competitive gap of USD 180 billion. As per another report by ET Magazine Survey, many MSMEs recover more than half their receivables after more than 90 days. About 17% of MSMEs write off one-fifth of their debt every year. This highlights the need to create an inclusive financing environment for all firms.
The Indian banking market has been described as a complex and unique one, wherein, most advanced tech stacks simplify advanced payments and transfer monies within seconds, but not without the absence of a majority of medium and small enterprises (MSMEs) starving for credit while still grappling with the after effects of credit shortage encountered in the past. The pandemic only highlighted the need for the availability of business liquidity to deal with sudden market turbulence, for all economic sectors including the Indian supply chains.
In India’s highly unorganised supply chain industry, it becomes difficult to make a connect between the borrowers and lenders in order to create a healthy SCF ecosystem. Moreover, according to a CredAvenue report, ‘The depth of supply of capital is still not comprehensive for the SCF ecosystem, and even if supply is there, it is prohibitive costs that have reduced the offtake.’ There is also the issue of absence of a centralized data bank that SCF providers/lenders can use in order to conduct pre-disbursement checks. This is a significant problem when there isn’t a known, trustworthy bigger organisation in the financial transaction, especially in case of MSMEs, who are eventually often left out.
Supply chains today go through continuous transformation in order to maintain their competitive advantage, globally, which leads to a greater potential for optimisation of the entire value chain. This affects a company’s capital structure, risk level, operating costs, profitability, and ultimately market value. SCF enables the rationalisation of finances by creating cooperation between manufacturers, suppliers, customers and logistics intermediaries. The optimization of financing outside the company’s borders is achieved by reducing the cost of capital and accelerating cash flows.
According to Surajit Das, Chief Business Officer, CredAvenue, “The Total Addressable Market (TAM) for SCF in India is almost INR 40 lakh crore and every hop in the supply chain presents a financing opportunity,” however, in the Indian context, we seem to have scratched just the surface of a SCF Pandora’s Box, which is full of opportunities.
It has been an age-old problem that the supplier wants to get paid as soon as he ships the goods while the buyer prefers a longer credit period to ensure safety at his end of the transaction.
Supply Chain Finance can help both buyers and suppliers in growing their business by bridging this gap. With a variety of SCF instruments available to choose from, the buyers can pay their suppliers early and get access to the credit period they need to better manage their working capital.
Basically, many different types of financial and risk management techniques, practices and tools come together to make various SCF instruments available to the users.
The term ‘Supply Chain Finance’ now refers to a wide range of approaches, systems, and solutions used in commerce financing (including international trade). It can relate to a single approach or a full set of strategies and solutions that fulfil the needs of buyers and sellers in increasingly complicated supply chains (particularly when trading on open account terms).
This is an abridged version of the original feature story that was published in the June 2022 edition of the Logistics Insider magazine. To read the complete article, click here.