Supply Chain Finance in India

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Successful SCF programmes bridge the functional gaps and align the organization to a common Procure-to-Pay strategy.

In order to understand how supply chain finance can help both buyers and suppliers, it is important to understand its underlying principles. Below are some common questions that people ask about supply chain finance and its benefits.

What is SCF?

Supply Chain Finance (SCF) provides short-term credit that optimizes working capital for both the buyer and the seller. It generally involves the use of a technology platform in order to automate transactions and track the invoice approval and settlement process from credit disbursal to the Repayment on a due date.

Supply Chain Finance is able to create a ‘win-win’ situation for both buyer and supplier by giving the buyer the opportunity to extend payment terms and pay the supplier in advance. It is also known as Supplier Finance or Reverse factoring. Unlike  Traditional Factoring where a supplier wants to Finance its Receivables, SCF is a financing Solution initiated by the ordering party in order to help its suppliers to finance its receivables more easily and at a lower interest rate.

Effective Supply Chain Finance solution delivers full working capital solutions.

Traditional Finance v/s SCF

Basically, in traditional finance, funding sources are cash rich buyer and Buyer’s working capital. The financing rates are typically higher and take more time in payment. This involves high risks for banks due to open end use of funds.

SCF  is a combination of services and technology solutions that link buyers, suppliers & finance providers to improve the visibility, financing cost, availability, and delivery of cash when supply chain events take place. The source of funding involves buyer/suppliers, buyer-bank or supplier-bank, third-party & financial institutions. The rate of interest typically lower due to the better rating of the buyer. Payment timings are faster due to automation and pre-approved programme norms. It involves lower credit risk, as the movement of goods and use of funds can be tracked better & no collateral security required.

Transaction Flow – Supply Chain Finance

How can blockchain technology be applied to supply chain finance?

In this era of digitization, Blockchain emerged as a game changer as it is able to digitize the documents involved in SCF on a shared ledger which is accessible or visible to all involved parties in the supply chain.

A supplier and buyer along with all participants are able to update the information and every transaction solely which result in enhancing efficiency and builds a higher level of trust.

The best part is that it cannot be tempered or changed, hence reducing the chances of corruption or fraud. Basically, blockchain has the ability to create long term robust supply chain ensuring security and transparency.

The mechanics of Supply Chain Finance

“SCF requires the involvement of an SCF platform and an external finance provider who settles supplier invoices in advance of the invoice maturity date, for a lower financing cost than the suppliers’ own source of funds. This benefit is then shared among the parties.”

The mechanics of Supply Chain Finance After ordering from the Supplier (1), the supplier then fulfills the order and invoices the buyer (2). The buyer then approves the supplier’s invoices and confirms that it will pay the financial institution for these at invoice maturity (3). The supplier sells (discounts) the invoices to the financial institution at a predetermined discount rate (4) and receives the funds straight away (5). The buyer pays the financial institution as agreed at maturity of the invoice (6). In parallel to the SCF facility, the buyer is typically able to negotiate better payment terms and/or prices with the supplier.

Why do companies implement Supply Chain Finance?

Companies implement SCF for far more reasons than just cash release

Key success drivers for Supply Chain Finance programmes.

To maximise the working capital potential of a SCF programme it should be part of an integrated Procure to Pay (P2P) strategy and approach – follow the lead of many global companies that have already implemented SCF.

  • SCF has been around for decades, resulting in multiple technology approaches that offer different levels of flexibility and integration with your ERP system – selecting the right one is key for long term success
  • Cutting-edge Fintech allows you to tap into global financial markets. The off-balance sheet nature of SCF allows adding financing providers despite possible restrictions from debt covenants.
  • Successful SCF programmes bridge the functional gaps and align the organization to a common Procure-to-Pay strategy.
  • Minimize invoice approval times, maximize use of e-invoicing, self-billing, and cooperation with suppliers.
  • Payment term and payment run enhancement; Differentiated terms strategy with aligned payment runs.
  • Consideration of small business suppliers; be economic with corporates – nurtures.

SCF: Major market players in India

The market is mostly fragmented between 

  • PSU Banks (SBI, Bank of Baroda Etc.),
  • Sector Banks – (HDFC, Axis, IndusInd, and others),
  • MNC Banks- (Stan C, HSBC etc.),
  • NBFC’s- (Tata Capital, Aditya Birla Finance, Hero Fincorp etc.),
  • Fin techs are the newest entrants in SCF: Vyana, Livfin, LendingKart, Capital Float etc.

Recent trends in Supply Chain Finance

  • Shift from documentary trade to Open Account and SCF
  • Factoring and SCF are expected to grow at a decent Rate
  • Change in buying/selling activities by MNC clients – Centralized RTC/SSC set up
  • “Integrated” treasury solutions that can meet client’s overall needs
  • Regulatory and compliance considerations (e.g. Factoring Act, KYC, Big Data)
  • Digitization of Trade
  • The emergence of non-bank funding/platform providers
  • Cost of financing in emerging markets
  • Liquidity and/or balance sheet constraints
  • New solutions/risk mitigation techniques (Blockchain, BPO, multibank/syndicate deals)

Opportunities

  • E-commerce – In line with the current trend of Indian Economy moving towards online sales from offline platforms corporates have a huge opportunity to fund their supply chains through SCF. It has already taken a major share in Mobile, Electronics & Apparels Industry.
  • Integrated Approach – Opportunity to fund both forward and backward integration along the value chain. Vendor Finance-Inventory Funding -Retail Funding
  • Online Platforms / Automation – Digitization can provide big leverage in terms of both integration and flow of information for the Banks & other stakeholders.
  • P2P Lending: trends online market place for SMEs for Invoice Discounting through Bidding by different Financial Institutions
  • Potential Sectors- Focus on untapped or lesser explored Industries such as Commodities, Electricals & Electronics, Consumer Durables, FMCG & Agro-based Industries to finance their Supply chain.
  • Startups- Templated Innovative Products to fund their Supply Chain

Challenges

  • Acceptability and Awareness about the product among stakeholders such as Channel partners and suppliers.
  • Concentration on a few selected industries only, Majorly organized industries.
  • Onboarding & monitoring of dealers/suppliers due to geographical spread.
  • Unsecured nature of lending.
  • Diversion of funds for other purposes
  • Anchor requirement of pushing sales sometimes invariably increase the risk in the system.
  • Biggest Lenders still use Traditional sourcing and Assessment Techniques
  • Big Paperwork leads to Higher TATs
  • Lack of availability of a common platform for financers.

Key innovations for 2020 and their impact on Banking sector:

  • Artificial Intelligence
  • Cognitive opportunities
  • Blockchain & Distributed Ledger Technology
  • FIN Tech.
  • P2P Lending
  • Robotic Process Automation
  • Cyber Security.
  • Digitization
  • No more queuing, one quick tap and you’re done.

Disclaimer: The opinions expressed in this article are solely those of the author and not of his organization. The objective of the author is not to market his company’s products.  Data unless specified is from anonymous sources and personal interactions.

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