Growth of India's over 63 million MSMEs on the back of a strong digital infrastructure, coupled with the fintech sector's prowess in easing credit in the market will be important pillars for the country to reach its aim of becoming a $5 trillion economy.
New innovations are introducing newer methods of bridging the $300 billion credit gap in the market and India is becoming increasingly business-friendly.
The time hence, is ripe to evaluate fintech from the lens of supply chain finance innovations and support India's neighborhood retailers and small entrepreneurs who not only are the most critical players in the delivery value-chain but also key to pushing the MSME sector's contribution to GDP from 30% to 50%.
Growth through supply chain
It is apparent that the thriving supply chain finance market is proving instrumental to the economic growth in the country. The value of the addressable supply chain finance market in India is estimated to be around Rs 60,000 crore while the total market value is appraised at Rs 18 lakh crore.
The virtue of anchor-led supply chain financing lies in its ability to provide even small buyers tied to an anchor supplier, with credit for their regular purchases, through a third-party lender.
For lenders, the criticality of small buyers' dependence on the anchor supplier for their business reduces the risk of defaults or non-payments and allows them to provide credit and flexible payment periods.
Gearing for high performance
Reverse factoring is a highly favourable strategy withing supply chain financing, wherein the buyer instigates the financing of credit invoices of sellers. This can be beneficial to both sides of the trade.
While reverse factoring is primarily used to stretch out days payable outstanding, it can afford other key advantages like decreasing the supplier default risk and simplifying the process. Moreover, studies have even shown that reverse factoring in supply chain finance enhances economic performance and facilitates smoother operations. Streamlining the credit flow in this way is bound to create support and respite for businesses.
Winning on all sides
Reverse factoring is simpler than it sounds and far more advantageous than it seems. A reverse factoring supply chain programme posits the supplier as the 'anchor' to be linked to their distributors and retailers.
It helps tier-3 and tier 4 buyers (retailers and distributors) finance their purchases from their anchor-suppliers and renders value chains accessible to financial institutions (FI).
The organisation and transparency of this method allows for quick onboarding of an anchor-supplier's distributors and buyers without requiring a sanction from an FI and a more efficient invoicing process.
An anchor-led financing system offered by platforms such as Solv enables seamless trade between buyers and retailers, helping companies to expand their businesses in a hassle-free manner with fully trackable transactions.
This creates a win-win situation for the 'anchor' supplier, who receives payment in full from FIs, as well as for the buyer, who gets fast and easy access to the required inventory on time along with collateral-free credit from the FI.
The buyer also gets an opportunity to establish a reputable record in the eyes of FIs and gets discounts from the anchor supplier on purchases in the future.
One of the signs of a healthy economy is a seamless harmony between FIs and MSMEs. Anchor-led supply chain financing removes credit hurdles and liberates FIs, MSMEs, buyers and retailers.
Creating accessible digital spaces for retailers
India is home to around 12 million retailers, specifically in the groceries, FMCG, pharma and electronics sector. The market is also suffering a $300 billion credit gap. Anchor-led finance has the potential to fill this deficit by empowering retailers across the country and even bring NTCs into the fold.
Supply chain platforms attach retailers to anchors, opening up a world of financers through the seamless invoicing process. Retailers can find true solace in such platforms, which allow the smooth streamlining of inventory and timely payments.
Anchors can also benefit greatly from such platforms, which not only provide a comprehensive view of all invoices from various retailers but also offer an insightful overview of utilisation and value coverage.
Additionally, the anchor can view invoices backed, transaction limits and pending invoices. This allows the anchor to effectively manage their credit and collection risk.
If the credit gap in India is to be bridged effectively and India's 12 million retailers are to flourish in the future, anchor-led buyer finance is the way forward.
(The author is CEO, Solv.)
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