NBFCs are redefining the role of Supply Chain Finance in India
India’s Micro Small & Medium Enterprises (MSME) sector plays an important role in currently contributing to 29 percent of India’s GDP and 50 percent of exports while employing 110 million people. MSME sector, according to a UK Sinha-led RBI panel report has a total unserved credit market from mainstream lenders of around Rs 20-25 trillion, out of which around 50 percent is for working capital needs. These MSMEs will not be able to grow and flourish unless this credit gap is serviced more cost-effectively and efficiently. With this huge credit opportunity and the thrust on MSME lending, it can be served by offering supply chain financing (SCF) services to lending efficiently and prudently to the sector.
Through innovative credit models and solutions, NBFCs are providing supply chain financing to MSMEs extensively and meeting their credit requirements. The digitization of supply chain financing has become essential to ensure that MSMEs have access to affordable and easy financing options. In today’s highly connected business world, the relationship between companies, suppliers and distributors has become increasingly digitized. Right from sourcing the raw materials to end customer supply—businesses have been transforming their operations to adapt to the ongoing technological evolution happening in the ecosystem.
Supply Chain Finance in a B2B environment is an arrangement wherein an organisation gets its supplier’s payments financed by an external financier. This greatly enhances the access that MSMEs have with far larger corporate and provides them with access to working capital for their operations than traditionally possible. SCF for working capital is much safer in the sense that there are greater transactional controls. For example, it offers control over end-use of the funds, trapping of sales collections, enforcing of stop supply and even short-term credit against a valid trade.MSMEs now have a number of financing options owing to new-age supply chain platforms that are not only bringing together the different players in the value chain but also helping MSMEs meet their cash crunch with timely, cost-efficient and short-term credit.
NBFCs that join forces with supply chain finance platforms will be able to offer credit to MSMEs by leveraging technological interventions and digital solutions that help with risk assessment. For instance, in the absence of credit history, AI-backed risk assessment solutions will help lenders evaluate the borrowers’ creditworthiness and expected business growth.There is a dire need to ensure that every player in the supply chain ecosystem has better access to credit to meet their trade financing needs. In such a scenario, we will see a perfect mix of different types of lenders coming forward to power supply chain financing in 2023 and beyond.
In conclusion, supply chain financing to MSMEs digitally, ensures an increase in credit coverage and collateral needs of the borrowers, while increasing the credit quality of the loans. In this manner, supply chain relationships will become more strategic and stickier in the coming years. This will, in turn, have a multiplier effect on the economy making it from 2 trillion to 5 trillion economy, making it more resilient to the non-performing asset (NPA) problem, formalising it, increasing compliance, increasing government revenue and even reducing tax rates.
