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. It is the vision of the Union Minister for MSME, Nitin Gadkari, to increase the contribution of this sector to over 50 percent of India’s GDP and exports to 75 percent. However, this 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.
Supply Chain Finance in a B2B environment, is at its core, an arrangement wherein an organisation gets its supplier’s payments financed by an external financier. This greatly enhances the access that MSMEshave with far larger corporates and provides them with access to working capital integral for their operations at far lower costs 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. Apart from this it also increases opportunities to cross-sell for financial institutions. Mr Sinha’s report also suggests implementing cash flow based lending, invoice factoring and suggests leveraging Goods and Services Tax Network (GSTN) data as an enabler in due diligence.
However, several factors stunt the growth of MSME SCF lending in our country. Despite benefits, Supply Chain Finance has not picked up in the country as compared to working capital finance, because of a lack of digitisation, which in turn hampers the assessment of the borrower and collateral provided. Further, there is no standardisation or digitisation in invoice and Purchase Order (PO) formats across MSMEs. Moreover, the transactions which take place tend to be high in volume but of low value, and when not digital these drive costs up and reduce the efficiency of the process. Digitisation itself remains the answer to overcome these impediments. MSME SCF lending can be made attractive for lenders by digitising the entire process right from assessment to lending to repayment.
Partnerships with Fintech companies who understand the GST and SCF domains are extremely advantageous for financiers. Such companies use technology and leverage the invoice and E-Way Bill data available with GSTN for assessment, along with soon to be launched initiatives like public credit registry and account aggregation services. Further, these Fintech companies help digitally establish the trade relationship/the proof of delivery of goods between the Buyer and the Seller using GSTN. Also, they digitise the end to end transaction workflows by allowing electronic invoices/POs and acceptances by digitally signing the same.
Platforms such as TReDS can also collaborate with GSTN through licensed GST Suvidha providers (GSPs) to increase their financing coverage to first-tier suppliers and dealers as well as second-tier and beyond.
Recently, there have been many initiatives taken up by the Government to increase lending to MSMEs through the formal sector. These include the launch of tools such as Trades Receivable Exchange platforms (TReDS). This primarily focuses on enabling the financing of trade receivables of MSMEs through multiple financiers. It also discounts invoices of MSME sellers raised against large corporates, thereby allowing them to reduce their working capital needs and prevent a cash crush situation. There have also been suggestions for this platform to collaborate with Goods and Services Tax Network (GSTN).
Steps have also been taken to launch a Public Credit Registry as well as account aggregation services. The Government has also been swiftly implementing the suggestions of the RBI formed high-level committee under Mr. Sinha. They have also looked at incentivising and easing digital payments, offered large cuts in corporate income tax rates and have even further rationalised GST rates.
In conclusion, supply chain financing to MSMEs digitally, ensures an increase in credit coverage, reduction in cost 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 and subsequently, banks too will get new customers. This will, in turn, have a multiplier effect on the economy, making it more resilient to the non-performing asset (NPA) problem, formalising it, increasing compliance, increasing government revenue and even reducing tax rates.
Views expressed in this article are personal opinion of Vinod Parmar, Global Head – Sales and Marketing of Vayana Network.