Technological Advancements Changing the Dynamics of Supply Chain Finance Ecosystem

Arun Poojari

Micro Small and Medium Enterprises (MSMEs) have shown tremendous growth over the years. An annual report by KPMG stated that their contribution to India’s GDP was 8% in 2011-2012 and was estimated to reach 15% by 2020. The actual FY20 numbers stand far above 30% and employ over 11 crore people.

Today MSMEs are the driving force behind “Aatmanirbhar Bharat,” “Make in India,” and “Vocal for Local” initiatives. The sector is bravely coping with the supply chain disruptions caused by the pandemic, the ongoing Russia-Ukraine geopolitical issues, and frequent lockdowns in China due to subsequent covid-19 waves. Despite such significant contributions and ferociously fighting odds, MSMEs struggle to be part of the mainstream financial ecosystem.

A sustainable Supply Chain Financing (SCF) ecosystem is the need of the hour to provide businesses with low-cost and time-efficient access to cash flows to meet their working capital requirements and optimize operating cycles. Invoice discounting facilitates suppliers by providing immediate cash in hand against unpaid invoices. Though at a discount, sellers benefit from instant liquidity rather than follow up with buyers asking for an extended credit period.

Technological Advancements in SCF Ecosystem

The SCF ecosystem is witnessing a paradigm shift with digital adoption.

Technological advancements, increased availability of data, and improved transparency and visibility on trade transactions are changing the dynamics of the SCF ecosystem.

Also Read | Factoring Services – The most effective low-cost working capital solution for MSMEs

Cash is the lifeline for business growth and is an ongoing concern with the widening working capital gap. Automating the cash inflows and outflows help businesses preempt and address working capital gaps. Artificial intelligence and machine learning techniques provide real-time predictions on changes in payment patterns to help businesses take prompt action to avoid cash flow mismatch.

Additionally, MSMEs have continued to struggle to get access to cost-effective financing from traditional lending channels. Fintechs are leveraging technology in the lending space with custom-made ML models using alternate data to overcome challenges due to lack of credit history or low credit scores. This is helping banks and NBFCs to move from an asset-based to cash flow-based lending model. AI provides deeper insights into repayment patterns and predictions on seasonality and defaults using alternate data like GST data, inventory, transaction history, domestic economic factors, sectoral trends, mobile data, etc.

With the advent of technologies like blockchain, supply chain finance can widely spread its wings for lending to cross-border trades. Since numerous parties are involved, the validity of shipments is a cumbersome task. Blockchain eliminates the central authority and makes the process seamless as all parties can transparently view the contract. Blockchain can provide inclusive alternate financing with access to a well-structured framework when global supply chains are disrupted across sectors like electronics, automobiles, pharmaceuticals, and many more.

Also Read | MSMEs must leverage modern tech and innovate, to survive & thrive: Harish Gupta, Head-IT, CGTMSE

In the pre-pandemic era, supply chain financing primarily catered to post-shipment funding requirements. However, small businesses are looking for pre-shipment funding in the post-pandemic arena. The future has a lot of scope in this segment. AI and ML algorithms can help predict potential financing opportunities from pre-shipment to post-shipment and forewarn associated risks.

The Future Scope

With SCF establishing itself as an alternative financing method with robust digital infrastructure, the contribution of MSMEs to GDP and exports can rise further in the coming future. A thriving supply chain finance market can play an instrumental role in India’s economic growth. More competition in this segment will accelerate the current scale and pace to cater to a wide range of solutions. Innovative approaches can address suppliers’ differing and varied needs at every supply chain tier.

Attributed to Arun Poojari, Co-Founder and CEO, Cashinvoice

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