The growth of more than 63 million micro and medium-sized enterprises in India on the back of a robust digital infrastructure, along with the prowess of the fintech sector in facilitating market credit, will be important pillars for the country to reach its goal of becoming a $5 trillion economy.
New innovations offer new approaches to bridge the $300 billion credit gap in the market and India is becoming increasingly business friendly.
Now is the time to evaluate FinTech from the perspective of supply chain finance innovations and support for neighborhood retailers and micro-entrepreneurs in India who are not only the most important players in the delivery value chain but also key to driving the contribution of the MSME sector to GDP from 30% to 50%.
Growth through the supply chain
It is clear that the booming supply chain finance market is proving to be instrumental in the economic growth of the country. The addressable supply chain finance market in India is estimated to be around Rs 60,000 crore while the total market value is estimated at Rs 18 crore.
The virtue of centered supply chain finance lies in its ability to provide even small buyers associated with a major supplier, with a loan for their regular purchases, through an external lender.
For lenders, the importance of small buyers’ reliance on the primary resource for their business reduces the risk of default or non-payment and allows them to provide credit and flexible repayment periods.
Prepare for high performance
Reverse factoring is a very favorable strategy with supply chain finance, in which it induces the buyer to finance the sellers credit invoices. This can be beneficial for both sides of the trade.
While reverse factoring is primarily used to extend payable days, it can provide other key benefits such as reducing the default risk of a supplier and simplifying the process. Moreover, studies have shown that reverse factoring in supply chain financing enhances economic performance and facilitates smoother operations. Simplifying the flow of credit in this way should provide support and comfort to businesses.
Winning from all sides
Reverse factoring is simpler than it sounds and much more useful than it sounds. A reverse supply chain program assumes that the supplier is the “anchor” that must be linked to distributors and retailers.
It helps Level 3 and Level 4 buyers (retailers and distributors) finance their purchases from their primary suppliers and makes value chains accessible to Financial Institutions (FI).
The regulation and transparency of this method allows for quick setup of distributors and affiliated buyers of primary suppliers without the need for a financial intermediary penalty and a more efficient billing process.
The centered financing system offered by platforms like Solv enables seamless trade between buyers and retailers, helping companies expand their businesses in a hassle-free manner with fully traceable transactions.
This leads to a win-win situation for the “primary” supplier, who receives payment in full from the financial institutions, as well as for the buyer, who gets quick and easy access to the required stock on time along with collateral-free credit from the financial intermediary.
The buyer also gets the opportunity to establish a reputable track record in the eyes of financial institutions and receive discounts from the primary supplier on future purchases.
One of the signs of a healthy economy is the seamless harmony between financial institutions and MSMEs. Anchor-led supply chain finance removes credit hurdles and frees financial institutions, MSMEs, buyers and retailers.
Create accessible digital spaces for retailers
India is home to about 12 million retailers, specifically in grocery stores, consumer goods, pharmaceuticals, and electronics sectors. The market also suffers from a credit gap of $300 billion. Financing led by financial institutions has the potential to plug this shortfall by empowering retailers across the country and even bringing non-state firms into the fold.
Supply chain platforms connect retailers to anchorages, opening up a world of financiers through a seamless billing process. Retailers can find true solace in such platforms, which allow seamless streamlining of inventory and timely payments.
Anchors can also benefit greatly from these platforms, which not only provide a comprehensive view of all invoices from various retailers but also provide an insight into usage and coverage value.
In addition, the anchor can view supported invoices, transaction limits, and pending invoices. This allows the organization to effectively manage credit and collection risks.
If India’s credit gap is to be effectively closed and India’s 12 million retailers boom in the future, anchor-led buyer financing is the way forward.
(Author is CEO, Solv.)
Read also: Supply chains after COVID: The need to build back better