In SCF, the buyers have a bigger value and better credit than the sellers do. Let us explain how a simple Indian Supply Chain Finance and global SCF work with an example. A buyer (A) buys goods worth Rs.100,000 from a seller (B). B would want payment for these goods within 15 to 30 days from the date of sale. However, A may not be able to pay within that date. So, the buyer, A, arranges a third party (often known as a factor) to buy the invoices for the transaction and pay a bulk (around 80%) of the amount to the seller, B immediately. A would then negotiate for an extended payment date of about 60 days to arrange for this factor. This way, the seller gets immediate payment to finance his short-term needs, and A gets an extended payment deadline.
How does supply chain finance in India work? How does it compare to the global supply chain finance footprint? How does SCF help small and medium enterprises to improve their exposure? Let’s know about these in the following sections.
Due to their minimal resources, credit risk and unorganized nature small and medium enterprises are not backed by banks. In India alone, more than 96% of SMEs are not registered, and as a result, they cannot approach formal credit sources like banks and financial institutions. Thanks to globalization and the penetration of digital lending have helped SMEs to increase their profitability considerably, especially in the years since the pandemic of 2020.
Supply Chain Finance has helped small and rural SMEs in India improve their global footprint as well. Cross-border transactions with buyers and sellers living in different countries have been quite seamless ever since options like SCF were introduced. An importer arranges for a factor, who buys the invoices that the exporter sends him. The factor pays a bulk amount of the invoice amount to the exporter immediately. The remaining amount is paid when the importer pays the amount at the end of the extended payment time.
The working capital of the exporter and importer is freed up this way, and this mechanism of financing has played a vital role in the Indian Supply Chain Finance footprint today. With more and more SMEs embracing digital finance and integrating technology into their operations, one can only hope that their profitability and productivity will go on to match some of their global counterparts.
According to the data published in the World Supply Chain Finance Report, the volumes of SCF grew to the worth of USD 1.31 trillion in 2020 alone, with the industry only expected to grow further in the coming years. The global supply chain finance footprint has undergone a sea change in just the years after the COVID-19 pandemic. With all boundaries of sales transactions being quashed, supply-dominant economies like the USA, the Middle East and the European countries have witnessed a phenomenal increase in the number of their suppliers.
Factors, in the form of guarantee schemes have been created in many European countries (France, Germany, Switzerland and more). These guarantee schemes purchase the accounts receivables from the suppliers, and pay around 80% to 90% of their total value to the suppliers immediately, while also helping buyers negotiate a delayed payment period with the suppliers.
Supply chain finance in India is slowly catching up to global standards; however, there is still a long way to go when it comes to the growth of the Indian SCF sector. There is still a huge credit gap for SMEs and MSMEs (micro, small and medium enterprises) in India today. Though digital lending, embedded finance, government schemes and various financial inclusion schemes are trying their best to bridge the gap, a lot of work is yet to be done in that field. Also, not all SMEs are comfortable to embrace digital financing.
So many aspects like the lack of knowledge of digital banking, non-availability of formal credit and many SMEs being unregistered in India have led it to pale in comparison when compared to the global SCF footprint. The agriculture sector is where most rural SMEs are centered. However, these SMEs are not considered eligible for formal credit, because agriculture is an unorganized sector.
To bridge the gap between the Indian SCF footprint and the global SCF footprint, the Government of India, in collaboration with many fintech companies, has been implementing many schemes to make agriculture an organized sector and to ensure that rural SMEs in this sector get quick and affordable credit at all times. Also, more and more SMEs and MSMEs are introduced to digital lending options these days, which have a direct relevance to the Indian SCF scene today.
Supply chains all over the world were severely impacted by the pandemic of 2020. Supply chain finance came as a rescue to boost transactions globally during this time, and is set to scale great heights in the coming years. The major benefits of supply chain finance for buyers and sellers involved in a transaction are:
a) Extended payment dates for buyers
b) Better cash flow management and control for suppliers
c) Since buyers have a better credit rating than the suppliers, they can arrange for a factor that offers exciting and affordable interest rates for buyers
d) Trustworthy and healthy relationship between buyers and suppliers
With the concept of SCF gaining steam in the recent past, many new trends have been introduced in India to make it a cost-effective means to bridge the credit gap for SMEs. Some of these trends that go a long way in increasing India’s SCF footprint globally are:
a) Coordinating with fintech like Finverv, to get customized SCF options for businesses, automatic analysis of credit ecosystems & choosing the best channel for buyers & sellers, using fintech to offer ledger services and a transparent credit opportunity
b) Invoice discounting, Financing based on warehouse receipts and affordable financing options for businesses to buy new machinery
c) Secured SCF options, where a fintech provides a guarantee for invoices for reinvestment purposes
Now is the right time for small and medium enterprises in India and abroad, to open their doors to embrace different supply chain finance options, and strategically choose the one that suits their operations the best. The scope for SCF is always on the increase, and it wouldn’t be wrong to say that the more SMEs embrace SCF, the more that country’s GDP is bound to grow.