AI & ML: Pioneering a New Era in Risk Management for Working Capital & Supply Chain Finance

AI technologies, such as machine learning algorithms, enhance decision-making, enabling banks to carry out robust credit assessments by leveraging transaction data from external databases, shared Nirav Choksi, Co-founder & Chief Executive Officer, CredAble, in an exclusive interaction with Srajan Agarwal of Elets News Network (ENN).

How do you see banks’ trend towards directly originated supply chain finance deals shaping the future of working capital financing and the supply chain finance industry? What are the potential benefits and challenges?

A major evolution in the funding of supply chain financing is being seen worldwide. In the last two years, there has been a notable uptick in banks’ direct origination of supply chain finance deals. Several factors drive this trend. In today’s high-interest rate environment, direct origination deals enable banks to maintain profitability despite increased costs. It allows them to capture the full margin of supply chain financing deals rather than splitting it across other financial institutions through sub- participations.

In addition, the competitive landscape has intensified as large private credit funds have entered the market. As they exert competitive pressure on banks with flexible financing offerings, financial institutions provide tech-driven and personalised working capital financing solutions to remain attractive to clients.

On the broader front, this shift to direct origination deals is also due to changes in the global trade finance landscape, where open account trade now constitutes nearly 80% of all international trade. Banks are increasingly investing in real-time data analytics and
advanced technological solutions such as digital onboarding platforms and straight-through processing systems to adapt to a new set of risks and operational challenges.

To remain competitive and overcome challenges like increased risks, banks are forming more partnerships with FinTechs that provide innovative technology, advanced risk assessment models, and flexible working capital financing solutions to meet the needs of large trade volumes.

Can you analyse the growing partnerships between banks and FinTechs? How are these collaborations advancing supply chain finance solutions?

Today, banks globally are prioritising trade transformation projects. In addition to enhanced operational efficiencies and improved risk assessment models, a comprehensive supply chain financing platform that is scalable, flexible, and capable of rapid supplier onboarding is the need of the hour.

Also Read | Tech-Enabled NBFCs Empowering MSMEs with Supply Chain Financing Solutions

In light of this, FinTech partnerships will be critical for banks to replace monolithic and outdated legacy systems and speed up new-product development.

FinTechs are not encumbered by legacy systems and are more nimble in their approach. They bring agility, cutting-edge technology, and innovative, purpose-built solutions to the table. Combining this with banking stability and funding capacity can create a best-in-class
supply chain financing solution.

Strong partnerships with FinTechs can help banks become more agile in using emerging technologies to proactively anticipate and meet client needs. These partnerships allow for bank-agnostic programs that automate working capital management and streamline financing—enabling corporate clients and their network of suppliers, even those in the lower tiers of the supply chain, to access timely credit.

How is artificial intelligence reshaping supply chain finance by streamlining processes and enhancing transparency? What specific AI technologies are most impactful?

There is a gap in the trade finance products that clients need and what banks provide today. More than ever, borrowers seek trade finance providers to address their manual, error-prone pain points. To keep up, banks need unprecedented tech-enabled solutions to deliver steady returns.

This can be solved with emerging and mature tools such as Artificial Intelligence (AI) and deep data analytics that allow lenders to disburse credit faster and at scale.

AI technologies, such as machine learning algorithms, enhance decision-making, enabling banks to carry out robust credit assessments by leveraging transaction data from external databases. By analysing vast amounts of data, AI can also help financial institutions predict cash flow needs, optimise working capital, and identify potential financial risks.

What are the key implications of transitioning from collateral-based to cashflow-based financing models for markets like India? How does this shift affect risk management and accessibility?

In a country like India, with over 64 million Micro, Small, and Medium Enterprises (MSMEs), the growth of MSMEs is closely aligned with our quest to become a global economic power.

Also Read | SMEs process and cut costs using Cloud Computing, AI & Blockchain: Nirav Choksi, CEO CredAble

As the MSME credit growth momentum continues to increase with a demand of 33%, collateral-based traditional lending to this sector is fraught with challenges. This is primarily because MSMEs struggle to provide sufficient collateral or meet the stringent eligibility criteria that traditional asset-based loans demand. Transitioning to a cash flow-based financing model is more conducive to meeting MSMEs’ small-sum, immediate credit needs. Moreover, it enables lenders to assess the borrower’s creditworthiness based on actual revenue generation and cash inflows rather than relying entirely on asset valuations.

Credit assessments, in this case, are carried out by analysing the revenue streams and transaction data of these businesses through external databases and ecosystem partners.
Leveraging digital lending solutions and data analytics provided by FinTechs today can help banks assess the company’s cash conversion cycle and better evaluate the timing and reliability of loan repayments, leading to more informed lending decisions.

How should banks adapt to geopolitical shifts, and what are the implications for supply chain finance and global trade? What strategies can mitigate the associated risks?

In today’s divergent economic landscape, multiple disruptive forces are reshaping the foundational architecture of the financial services industry.

As geopolitical shifts alter global supply chains, banks must prioritise scenario planning and stress testing to evaluate how these disruptions could impact their operations and client businesses. Many banks today are urged to develop innovative working capital financing products, such as short-term, flexible credit lines, to address the needs of businesses navigating these changes. By partnering with FinTechs, banks can also enhance their risk assessment frameworks to account for disruptive factors that affect trade routes and supply chains. Digital platforms also equip banks with real-time monitoring and analytics that support better decision-making in supply chain finance.

FinTechs like CredAble, with an advanced suite of offerings including pre-to-post shipment financing and other need-based credit lines, enable financial institutions to unlock the benefits of delivering highly configurable working capital financing solutions to better navigate the complexities of global supply chain networks.

What future trends do you foresee in the working capital and supply chain finance landscape? How can companies prepare for these changes to stay competitive and resilient?

As trade dynamics globally are evolving, businesses need to focus on optimising working capital to tide over unexpected disruptions and maintain sufficient liquidity. One thing is certain—the growing complexities of global supply chains will require financial institutions to adopt more sophisticated working capital solutions and real-time cash flow forecasting capabilities. There’s no denying that supplier diversity and inclusivity have become important factors for banks to consider to maintain a competitive edge. Apart from leveraging automation and AI capabilities, financial institutions must also prioritise agility and adaptability to better respond to fast-changing supply chain trends.

With companies seeking innovative financing solutions tailored to their specific working capital needs, we will likely see a rise in partnerships with FinTechs that excel in this area.