Everything about Supply Chain Finance

In recent years, the Micro, Small, and Medium Enterprises (MSMEs) sector in India has faced challenges in accessing formal credit, hindering its potential for growth. However, innovative solutions are emerging, reshaping the financial landscape for these enterprises. This blog explores the transformative impact of technology-driven invoice financing, focusing on the Trade Receivables Discounting System (TReDS), which has gained substantial momentum in South India.

In a major development for the fintech and digital lending sectors, the Reserve Bank of India (RBI) recently released its highly anticipated Guidelines on Default Loss Guarantee (DLG) in Digital Lending. These guidelines have sparked excitement and positive sentiment among industry players and investors.

In a significant stride towards economic growth and self-reliance, India's micro, small, and medium enterprises (MSMEs) sector is poised for a remarkable transformation. According to a recent report by The Financial Express, the MSME base in India is projected to burgeon from 6.30 crore units to a staggering 7.50 crore units[^1^]. This unprecedented expansion brings with it not only vast opportunities but also unprecedented challenges, particularly in the domain of financing. Enter supply chain finance – a strategic solution that has the potential to address the financial bottlenecks faced by Indian MSMEs and pave the way for sustainable growth and prosperity.

When it comes to agreeing upon a suitable credit period for trade transactions between a Corporate buyer and their suppliers, there is often a tussle to arrive at a consensus. A supplier often seeks to get paid as soon as possible while the buyer would want to extend the Days Payable Outstanding (DPO) as much as possible to improve their respective balance sheets and working capital.

An integrated supply chain finance (SCF) program offers a win-win solution to all trade parties and ensures continuous, inclusive, and seamless working capital financing. A stable supply chain leads to increased profitability and growth for all supply chain participants, spilling over the advantages to the industry at large.

Lending today has transformed leaps and bounds in the last few decades. However, there’s still a lot more wiggle room for improvement when it comes to financial inclusion.

The ongoing COVID 19 pandemic is a 'Black Swan' event that has dramatically impacted businesses and economies across the globe. The measures to curb the spread of the virus, such as extended lockdowns and stay-at-home orders, are predicted to have longer financial ramifications that could trigger an economic downturn worse than the 2008 recession.

A crisis like the COVID-19 pandemic brings to light the necessity of treasurers optimizing cash reserves to yield maximum possible returns. During such times, treasurers have to manage cash requirements internally and opt for relatively less risky alternatives beyond Government funds, top-rated bonds, and fixed deposits to earn extra margins and improve treasury income.

It has been almost two months since the lockdown was imposed, restricting all economic activity and mobility across India. While there are still uncertainties as to what lies ahead, it is time to prepare ourselves with what life might look like post lockdown.

Supply chain finance has been around for decades, with a potential global revenue pool of $20 billion. However, to date, only 2 percent of the potential has been tapped into globally as supply chain finance is restricted exclusively to the first tier of suppliers and distributors of leading corporates. Despite the shortage of access to formal capital deeper down the supply chain, it still remains vastly unexplored globally and in India.

The outbreak of the coronavirus has brought economies across the world to its knees as Governments struggle to curb the pandemic. Several businesses are staring at the grim reality of the consequences as India goes into lockdown for 21 days to fight the spread of corona in the country.

Small and Medium-sized Enterprises (SMEs) have become a high priority for governments world over as they directly impact economic development and employment. Despite its criticality, access to finance remains a key constraint affecting the sustainability and growth of small businesses.

Supply Chain Finance is often touted as a win-win solution benefitting all three stakeholders – buyers, sellers, and financiers – equally. However, suppliers are still wary about entering into a supply chain finance program. While the seller’s doubts are legitimate, given the conflicting trade interests of buyers and sellers, when it comes to SCF they are misplaced.

Supply Chain Finance has the potential to be a $20 billion revenue market with revenues growing 20% every year since 2010. The revenues are expected to continue growing at 15% for the next 3-5 years. While those numbers are impressive, the reality is that the supply chain finance industry stands only at $2 billion in revenue today.

Entrepreneurs rarely get into business dreaming of small enterprises. The dream is always to grow bigger and to thrive in competitive environments. However, in challenging economic scenarios, small businesses fight hard only to survive, let alone thrive

Traditional Supply Chain Finance offerings of Invoice Discounting or Reverse Factoring have been around in businesses for a while now. The suppliers are paid early in exchange for a fixed pre-determined discount rate by third-party financiers on-boarded by the buyer.

In today’s interconnected world, the advent of new age technologies constantly evolves the frontiers within which businesses function- and treasury management is no exception.