Supply Chain Finance: Solution to Lending Woes of the MSMEs

Supply chain finance is not a new age concept though in India, the market penetration is minuscule, and still, MSMEs are not taking supply chain finance with alacrity. With that said, with the recent developments in the law and RBI initiatives, SCF is gaining pace in the Indian MSME ecosystem.

Supply chain finance: A Crucial Aid to MSMEs

What is supply chain finance in the first place? Vendors need the immediate payment for their invoices for their working capital, and buyers need an extended credit period to pay the invoice to optimize the cash flow. Through supply chain finance, vendors raise an invoice in the name of the “anchors.” They are the NBFCs that approve and finance the invoice. So, vendors get faster payment of an invoice at a small fee, and the buyer has an extended credit period. So, both parties are in a win-win situation in SCF. 

It helps MSMEs to optimize their cash flow and always keep their day-to-day operations manageable and does not let operations be affected due to the shortage of working capital. So, the vendors get short-term finance for their organization, and buyers get the time to pay the vendors. 

Moreover, there are 63 million Indian MSMEs, generating 11 crore jobs, thus, becoming the second largest employer in India. So, the Indian MSME sector holds tremendous potential for the upliftment of India Inc., though, on the other hand, the supply chain finance gap is 60,000 crore. They are not able to get on the bandwagon of SCF! 

With the potential of supply chain finance, the Indian government is pushing forward policies that will increase the penetration of SCF in the MSME Sector.

Initiatives Undertook by RBI to Boost SCF

The amendment in the Factoring Regulation Act of 2011 has increased the financial inclusion for Indian businesses. As the Indian MSME ecosystem can benefit from SCF tremendously, RBI undertook initiatives for lenders to make the lending process hassle-free. Therefore with these initiatives, NBFCs and lenders have diverse revenue streams. Along with multiple revenue streams, they will be helping the backbone of the nation.  

  • Trade receivable Discounting System: Launched in 2018, it’s an electronic platform for facilitating payments and receivables for MSMEs. It allows businesses to simplify and discount trade receivables from multiple financiers. Therefore, it makes the whole factoring process seamless and less complicated.
  • Account Aggregator Framework: It’s a centralized platform that will give businesses control of their financial data. They can allow sharing access to their financial data with specific organizations, and central agencies can access data through the same portal. In this way, a safe ecosystem exists for buyers and suppliers to engage in financial transactions.

Conclusion

At last, supply chain finance is the answer to your cash crunch problems as an MSME. Therefore, if you are a manufacturer, trader, or distributor in India, getting access to formal credit is difficult, but with SCF, things will get easier. So, CredFlow is an Indian fintech that is helping MSMEs to get access to SCF. Along with the rise of the fintech industry, the biggest hindrances to supply chain finance, i.e., manual paperwork and complicated processes.

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