Supply Chain Financing 🇮🇳 : Empowering MSMEs of India
Moving "beyond" large corporations and their immediate suppliers
Supply Chain Financing (SCF) has been of huge interest for me for last 10 yrs in financial services and fintech. SCF has emerged as a critical tool for businesses to manage their supply chains, enhance financial performance, and bridge the credit gap. But there was one big problem though. Most of what we saw in India was anchor led financing (anchor = Tata Motors or similar large cos). The landscape of SCF is rapidly evolving now, with new models and technological innovations offering inclusive solutions to address the challenges faced by smaller businesses. This article delves into the transformative impact of SCF, spotlighting key insights from industry leaders and founders.
The Evolution of Supply Chain Financing
The supply chain finance market in India is large and is estimated to be worth around ₹60,000 crore, with the potential to grow significantly as more SMEs and MSMEs adopt SCF solutions. Traditional SCF has predominantly served large corporations and their immediate suppliers, often leaving smaller players in the supply chain struggling for capital. However, the introduction of small-to-small (S2S) financing is revolutionizing the sector by extending financial support to Tier 2 and Tier 3 MSMEs. Technological innovations, such as blockchain, e-invoicing, and digital platforms, are also driving the adoption of SCF solutions, making them more accessible to smaller businesses
"S2S financing is a one-stop plug and play solution for cash-flow based financing to small MSME sellers," says Alok Mittal, founder of Indifi Technologies. "This model enables cash flow-based credit analytics for MSME buyers instead of the traditional balance sheet-based risk assessment". This innovative approach leverages digital credit assessment, allowing banks to make informed credit decisions based on data from various online sources, including bank statements and GSTN.
Addressing the Challenges Faced by MSMEs
Access to finance has always been a significant hurdle for MSMEs. Despite their pivotal role in the supply chain, smaller businesses often face difficulties in securing funding due to lack of collateral, lower credit ratings, and financial instability. Economic disruptions like the COVID-19 pandemic have further exacerbated these challenges.
"S2S financing acts as a lifeline, bridging the credit gap and fortifying a more resilient economic landscape," remarks Basant Kaur, Country Head of C2FO in India. "With the provision of liquidity through C2treds and C2FO, businesses, especially MSMEs, will support and create thousands of jobs necessary for countries like India to continue on their journey of rapid economic growth".
Some banks that are focusing on supply chain finance include:
ICICI Bank
Axis Bank
State Bank of India
HDFC Bank Limited
Yes Bank Limited
Kotak Mahindra Bank Limited
Technological Innovations in SCF
The increasing demand for SCF has proven challenging for traditional banks due to high-risk factors. Technology offers a solution to these roadblocks. For instance, during a 12-month pilot in the RBI’s regulatory sandbox for MSME lending, a credit analytics engine was created to analyze the health of SMEs for over five participating banks. This analysis identified over 50 data points based on MSMEs’ cash flow statements, enabling financial institutions to make credit decisions with greater confidence.
"Technology becomes a great way to solve such roadblocks," states a spokesperson from the RBI. "The analysis helped identify key data points that enable financial institutions to take a credit call with deeper confidence" (February 13, 2024).
The use of technology in SCF has grown, with platforms offering end-to-end digital solutions for onboarding, underwriting, and loan management. This digital transformation has improved efficiency and transparency, making SCF more accessible to smaller businesses​
Expanding the Coverage of TReDS
The Trade Receivables Discounting System (TReDS) has traditionally served MSME suppliers of large corporates. The introduction of S2S financing is expanding this coverage to include MSME suppliers of MSME buyers. This model offers twin benefits: financing receivables from large enterprises and financing purchases from other MSME suppliers.
"This model of S2S is expanding the boundary of coverage to include MSME suppliers of MSME buyers," explains K.V. Srinivasan, Executive Director and CEO of Profectus Capital. "We expect MSMEs to benefit significantly from an immediate improvement in their cash flows at a very low cost" (May 10, 2023).
The Role of Fintech in SCF
Fintech companies are playing a crucial role in transforming SCF by providing fast, flexible, and equitable access to low-cost capital. C2FO, for example, has launched C2treds, an RBI-approved TReDS platform that offers both Early Pay and TReDS benefits to MSMEs in India.
"With the launch of C2treds, C2FO distinguishes itself as the only fintech platform of scale in India offering both Early Pay and TReDS functionalities," notes Alexander "Sandy" Kemper, CEO and founder of C2FO. "This platform is a significant step toward achieving our vision of providing capital to small and midsize firms globally" (May 16, 2024).
Key companies in SCF in India
KredX:
Provides customizable solutions ranging from enterprise finance to working capital management.
Uses technology and data to offer scalable products that accelerate finance for businesses of all sizes.
Focuses on cash flow management, channel financing, and alternative debt investment solutions​.
CashFlo:
An AP automation and supply chain financing platform aimed at unlocking financial potential for Indian businesses.
Creates an ecosystem for buyers, suppliers, and financiers through its platform model​.
CredAble:
A working capital tech platform offering a range of scalable products and value-added financing solutions.
Uses tech-enabled solutions to manage working capital and trade finance for businesses of all sizes​.
FinAGG:
Focuses on financing India's largest distributor and retailer networks.
Uses a platform to disrupt the lending market with a vision centered on SMEs and MSMEs​.
Vayana Network:
Connects corporations and their supply chains to financial institutions for easy, quick, and low-cost trade financing.
Preferred platform for trade finance and compliance with GST laws​.
Mintifi:
Provides working capital to businesses by automating the supply chain finance process.
Works with corporate clients to address inventory financing requirements of SMEs​
Yubi:
Banks have their own supply chain finance programs; however, they typically cater to only the first leg of the distribution supply chain: manufacturers and large distributors. The smaller distributors and retailers are geographically scattered and have smaller volumes in the lower part of the chain. They are often out of the ambit of these programs due to the bank’s limited risk appetite. Platforms like Yubi aggregate enough volume to make it profitable to lend to smaller distributors and retailers, addressing the credit gap in the lower part of the supply chain​
Conclusion
The future of supply chain financing lies in innovative models like S2S financing and the integration of technology-driven solutions. These advancements are crucial in bridging the credit gap for MSMEs, ensuring stable cash flows, and reducing the risk of disruptions in supply chains. As industry leaders and fintech companies continue to collaborate and innovate, the potential for MSMEs to thrive and contribute to the economy becomes increasingly attainable.
Supply chain financing is not just a financial tool; it is a catalyst for economic growth and resilience, empowering MSMEs to overcome financial challenges and achieve sustainable success.