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Smaller businesses contribute almost 30% to India’s Gross Domestic Product (GDP). Often, these businesses are unable to grow due to the lack of access to the formal banking system, which prevents them from keeping up with the increasing supply chain expenses.
Technology-based supply chain finance has been useful in reducing costs and optimizing working capital requirements especially when the Covid-19 pandemic disrupted the world. Businesses need short-term funding to meet their working capital needs during the post-pandemic environment and SCF is an effective method for providing liquidity to buyers and suppliers.
SCF – shifting from asset-based to cashflow-based funding
Traditionally, lenders offered asset-backed funding wherein the borrowers mortgaged their assets to procure loans. A major challenge faced by the smaller businesses was their lack of collateral, which limited their access to asset-backed lending.
Several lenders today recognize this limitation and are shifting from an asset-backed lending model to cashflow-based lending. Financial institutions are focusing on SCF to provide support to the small business community to scale up their business operations.
Lenders validate data from bank statements, past history, timely repayments, and ITRs to determine eligibility and limit NPA. Alternative systems like UPI, PoS transactions, GST data, and e-invoices are also validated to determine the creditworthiness of small businesses.
FinTech innovations in SCF
One of the most important issues in the SCF ecosystem is ensuring the lenders and borrowers meet. There is a huge demand for capital and ensuring there is adequate supply to meet this demand is crucial. Even if there is the availability of capital, the huge costs are limiting access to these funds.
As the Government focuses on the growth of MSMEs, ensuring small businesses receive their fair share of affordable and seamless funds is important. Here are four ways in which FinTechs can spearhead innovations to the supply chain finance ecosystem in India:
Bring access to capital
Modifying the model from a sales-driven approach to an anchor-led system can assist in bridging the gap between demand and supply of capital. It requires working with a large company to fund customers and suppliers. Companies must focus on enhancing the lender base, which includes banks, NBFS, and small finance banks.
Overcoming supply chain blocks
There is enough awareness on the demand side but the challenge is maintaining the supply side. Diversifying investors to include foreign banks, large and small NBFCs, and others on one platform can enable FinTechs to provide credit to small businesses. Technology-driven companies can also include HNIs and securitization to further diversify the investor base and bridge the gap between the demand and supply of credit.
Digitalizing the process
The first step is to procure KYC documents and financial statements from the potential borrowers, which are being digitalized to make the entire procedure seamless and smooth. End-to-end digitalization makes corporate onboarding cost-effective and quick, which ensures credit is available to customers and suppliers located even in remote locations within the country.
Use of advanced technologies
The pandemic amplified the need for finding advanced ways to enable companies to make accurate and informed decisions. Using advanced technologies like AI, ML, and analytics to sift through a large amount of data to understand what is happening and what is likely to occur in the future will boost the role of FinTech in the SCF ecosystem.
As smaller organizations offer SCF to their customers, FinTech firms are focusing on flexible technologies to broaden their customer base. Buyer-focused SCF requires the buyers to upload invoices but does not support automated accounts payables. On the other hand, the supplier-focused method requires the vendors to submit the invoice for approval before initiating the funding. Although submitting the invoice and approval is more efficient, buyers still must make the necessary adjustments to their accounts payables.
FinTech uses advanced technologies to support both models and make the entire SCF process more efficient, affordable and streamlined.
FlexiPayment uses an advanced technology platform targeted specifically for bridging the demand and supply gap in the MSME segment. FlexiPayment is gradually building a digital ecosystem around the cost-effective delivery of Supply Chain Finance, which will make it simpler, faster, and easier for MSMEs to access finance to meet their fund requirements.
