NBFCs Can Leverage Digital Platforms to Gain Traction in Supply Chain Finance
The COVID-19 pandemic and the volatile nature of the business environment have reinforced the need to leverage technology to boost supply chain networks. The biggest hindrance to the operations of the supply chain is the lack of working capital. As per a report by CII & Arthur D Little, India’s supply chain costs account for 14% (vis-a-vis global 8%), thus creating a competitive gap of $180 billion.
This gap is especially magnified for the small and medium enterprises sector, which forms the backbone of the Indian economy. It is estimated that India has 63 million small and medium enterprises, which is the second largest globally. They contribute to 29% of the gross domestic product and 49% of exports while providing employment for over 110 million people in the country.
While traditional models have not been of much help towards closing this gap and towards supply chain financing (SCF) for small businesses or corporates in need, various non-banking financial corporations (NBFCs) / fintechs are stepping up to do so. With the help of technology, NBFCs can leverage digital data and partnerships to ensure that the benefits of supply chain finance are extended to smaller businesses.
Digitisation of Supply Chain Finance
Technology-based solutions can help optimise the working capital for both buyers and sellers by enabling finance through short term credit for the entire supply network. As we see demand returning in the markets, these solutions can provide the needed impetus towards financial flexibility and stability.
Fintech organizations such as Yubi have cloud-based platforms that can make supply chain finance smooth by leading integration with both - anchor corporates and lenders, allowing a smooth flow of transactions. These solutions automate the process of invoice approval, settlement, and recovery by providing access to both buyers, suppliers, and anchor corporates. This improves business efficiency by allowing more time for the buyer to clear their outstanding amounts and immediate access to money to the suppliers.
NBFCs in the equation
While the supply chain financing model has existed for some time, the traditional approach has not been of much help for small businesses to avail the benefits. This is primarily due to a lack of data to assess risk and the fact that banks that work with large corporations do not traditionally serve small businesses.
The altered business environment over the last couple of years has thus led more MSMEs and even corporate to look at various non-banking finance corporations (NBFCs) to meet the dynamic needs of their supply chain. According to Intellias, the global adoption rate for Fintech was 64% in 2020 and is on a further rise. CGN Global also reported that 25% of companies are using Fintech in their supply chains.
As the Indian economy grows, owing to the recent government reforms, there is a huge demand for credit in the country. This has led to almost a race in the type of lending done across categories that led the RBI to get into the act of harmonization of regulations for lenders. Now, there is a greater convergence and harmony in the norms prescribed for banks, NBFCs and FIs. With this in mind, the RBI has shifted its focus to ‘activity’ based as opposed to an ‘entity-based’ regulation.
Some benefits for NBFCs that such a platform provides:
1. Risk assessment using data: While startups and MSMEs do not have credit histories to back them, the CredSCF platform can analyse historical data that includes details of inventory purchased, sales made, and payments cleared. Financial Stability Plans (FSPs) can also use this data to assess if the business deserves the credit.
2. Access to demand: The digital platforms act as an extended arm or an acquisition engine for lenders in this space. They help connect lenders to corporates who were erstwhile, not accessible to them. These platforms also aid the large tail of vendors/dealers whose cost to serve is high considering the traditional ways of delivering credit.
3. Insights on borrowers: Insights to financial institutions about key financial metrics is also provided. This way, they can help with the working capital and relieve suppliers of the responsibility of extending credit to merchants.
4. Acquiring and onboarding both merchants and distributors: For a supply chain finance solution to be successful, a considerable number of merchants and distributors need to be on board. This enables a collaborative ecosystem that boosts sales. A digital platform can help here as a meeting point between merchants and distributors and offer a chance to connect seamlessly.
5. Enabling payments: Such solutions help accelerate the flow of payments. Digitisation helps NBFCs access data to determine creditworthiness.
6. Accurate invoicing and orders: Digital solutions make it possible to document all orders and invoices accurately and thus helping with the creation of helpful data.
7. Inventory and distribution tracking: This data helps assess consumer demand and the need for finance and helps suppliers align their operations to merchant demands.
8. Interoperability: Interoperability is one of the critical factors and it really enhances the ease of accessing fund for different needs. For example, Yubi's interoperability function has expanded the scope of borrowing for its clients by allowing NBFCs to choose among multiple debt instruments based on their needs with just a click. In this approach, a client can use the platform to meet their credit needs throughout the business cycle.
Conclusion
Digitisation in financing helps provide deep data-driven insights and enhanced risk management solutions for lenders. It contributes toward generating liquidity in the supply-chain funnel while aiding better financial autonomy for small businesses.
The success of small-scale businesses is crucial for economic growth and job creation. However, they often face a resource crunch and thus find it difficult to succeed. NBFCs can provide a fair opportunity for these enterprises to scale up and can do this through data-based insights and partnerships enabled by digital SCF platforms.
This gap is especially magnified for the small and medium enterprises sector, which forms the backbone of the Indian economy. It is estimated that India has 63 million small and medium enterprises, which is the second largest globally. They contribute to 29% of the gross domestic product and 49% of exports while providing employment for over 110 million people in the country.
While traditional models have not been of much help towards closing this gap and towards supply chain financing (SCF) for small businesses or corporates in need, various non-banking financial corporations (NBFCs) / fintechs are stepping up to do so. With the help of technology, NBFCs can leverage digital data and partnerships to ensure that the benefits of supply chain finance are extended to smaller businesses.
Digitisation of Supply Chain Finance
Technology-based solutions can help optimise the working capital for both buyers and sellers by enabling finance through short term credit for the entire supply network. As we see demand returning in the markets, these solutions can provide the needed impetus towards financial flexibility and stability.
Fintech organizations such as Yubi have cloud-based platforms that can make supply chain finance smooth by leading integration with both - anchor corporates and lenders, allowing a smooth flow of transactions. These solutions automate the process of invoice approval, settlement, and recovery by providing access to both buyers, suppliers, and anchor corporates. This improves business efficiency by allowing more time for the buyer to clear their outstanding amounts and immediate access to money to the suppliers.
NBFCs in the equation
While the supply chain financing model has existed for some time, the traditional approach has not been of much help for small businesses to avail the benefits. This is primarily due to a lack of data to assess risk and the fact that banks that work with large corporations do not traditionally serve small businesses.
The altered business environment over the last couple of years has thus led more MSMEs and even corporate to look at various non-banking finance corporations (NBFCs) to meet the dynamic needs of their supply chain. According to Intellias, the global adoption rate for Fintech was 64% in 2020 and is on a further rise. CGN Global also reported that 25% of companies are using Fintech in their supply chains.
As the Indian economy grows, owing to the recent government reforms, there is a huge demand for credit in the country. This has led to almost a race in the type of lending done across categories that led the RBI to get into the act of harmonization of regulations for lenders. Now, there is a greater convergence and harmony in the norms prescribed for banks, NBFCs and FIs. With this in mind, the RBI has shifted its focus to ‘activity’ based as opposed to an ‘entity-based’ regulation.
Some benefits for NBFCs that such a platform provides:
1. Risk assessment using data: While startups and MSMEs do not have credit histories to back them, the CredSCF platform can analyse historical data that includes details of inventory purchased, sales made, and payments cleared. Financial Stability Plans (FSPs) can also use this data to assess if the business deserves the credit.
2. Access to demand: The digital platforms act as an extended arm or an acquisition engine for lenders in this space. They help connect lenders to corporates who were erstwhile, not accessible to them. These platforms also aid the large tail of vendors/dealers whose cost to serve is high considering the traditional ways of delivering credit.
3. Insights on borrowers: Insights to financial institutions about key financial metrics is also provided. This way, they can help with the working capital and relieve suppliers of the responsibility of extending credit to merchants.
4. Acquiring and onboarding both merchants and distributors: For a supply chain finance solution to be successful, a considerable number of merchants and distributors need to be on board. This enables a collaborative ecosystem that boosts sales. A digital platform can help here as a meeting point between merchants and distributors and offer a chance to connect seamlessly.
5. Enabling payments: Such solutions help accelerate the flow of payments. Digitisation helps NBFCs access data to determine creditworthiness.
6. Accurate invoicing and orders: Digital solutions make it possible to document all orders and invoices accurately and thus helping with the creation of helpful data.
7. Inventory and distribution tracking: This data helps assess consumer demand and the need for finance and helps suppliers align their operations to merchant demands.
8. Interoperability: Interoperability is one of the critical factors and it really enhances the ease of accessing fund for different needs. For example, Yubi's interoperability function has expanded the scope of borrowing for its clients by allowing NBFCs to choose among multiple debt instruments based on their needs with just a click. In this approach, a client can use the platform to meet their credit needs throughout the business cycle.
Conclusion
Digitisation in financing helps provide deep data-driven insights and enhanced risk management solutions for lenders. It contributes toward generating liquidity in the supply-chain funnel while aiding better financial autonomy for small businesses.
The success of small-scale businesses is crucial for economic growth and job creation. However, they often face a resource crunch and thus find it difficult to succeed. NBFCs can provide a fair opportunity for these enterprises to scale up and can do this through data-based insights and partnerships enabled by digital SCF platforms.
