Supply chain financing can resolve capital issues for MSMEs in a big way
The large penetration gap, coupled with the rise in global and Asia’s supply chain volumes over the last few years, point to a large market opportunity for the segment, says BLinC Invest MD
Globally, supply chain finance volumes have grown significantly in recent years, reaching a total value of $1.8 trillion in 2021 (as per the World Supply Chain Finance Report, published by BCR). "The supply chain financing market is expected to grow at a CAGR of 17.1 per cent," says Amit Ratanpal, Founder & MD, BLinC Invest in an exclusive interview with Bizz Buzz.
How does the supply chain financing funding landscape look like in India?
There are approximately 63.4 million MSMEs in India, contributing to around 30 per cent of the GDP and employing over 100 million people. Despite contributing significantly to the GDP and the workforce, most MSMEs do not have access to sufficient credit and liquidity required for daily working capital needs. Banks/NBFCs have traditionally preferred sanctioning term loans over working capital loans due to a lack of collateral and adequate borrower data.
Globally, supply chain finance volumes have grown significantly in recent years, reaching a total value of $1.8 trillion in 2021 (as per the World Supply Chain Finance Report, published by BCR). The supply chain financing market is expected to grow at a CAGR of 17.1 per cent. The Asia SCF market has grown at a CAGR of 29 per cent over the last seven years. Similar to global trends, supply chain financing (SCF) services could help fill the credit gap for MSMEs in India in a cost effective and efficient manner. As per various reports, it is estimated that the supply chain finance gap in India is Rs 60,000 crore, with current SCF penetration being less than 1 per cent of GDP. Further, SCF contributes only 5 per cent of the entire banking system's outstanding assets. The large penetration gap (especially in tier 2 and tier 3 cities), coupled with the rise in global and Asia's supply chain volumes over the last few years, point to a large market opportunity for the segment and the immense potential for product offerings in supply chain finance. Fundraising will also increase to meet the needs of MSMEs as they move toward the next phase of digitization.
We have also seen a cohort of startups trying to ease the credit pain points for MSMEs. There is a significant opportunity here with over 6 crore small businesses in India. But, there are also some challenges. Can you point out a few?
In terms of the current product offering, most banks and NBFCs offer a term loan, whereas the need of the hour is a 5-to-45 day credit product, which will meet the MSMEs' working capital needs. Further, there are several challenges in funding MSMEs right from customer acquisition and underwriting to collections: On the customer acquisition front, the acquisition costs are very high due to the highly fragmented nature of the market.
Banks are not able to underwrite MSMEs due to a lack of borrower data and difficulty in evaluating the collateral provided. Additionally, the cost of collection is very high because of high bounce rates resulting in extended payment cycles. Logistics costs are also high because many borrowers are located in remote areas.
Fin-techs offering a technology solution using a corporate anchor on-boarding platform will be a key emerging trend as it solves problems for multiple stakeholders, be it the anchor itself, distributor/retailer/MSME who can access working capital funding with ease, and banks and NBFCs who are now able to access a large underbanked market. Further, this model inherently creates high borrower stickiness on account of the long-standing anchor-distributor-retailer relationship and the purchase history data from anchor brands that help lenders understand risk exposure better and, therefore, underwrite the working capital loans on the back of more precise data.
What are top funded business models in this sector and what are the driving factors behind this investor interest?
Fintechs have revolutionized the SCF segment as technology improves access and allows financing to MSMEs further down the value chain across under-penetrated markets. There are multiple fintech-led SCF business models in the market -- Marketplace-cum-NBFC model: Includes on-balance sheet lending and the ability to test products across segments and markets.
Off-Balance Model: Fintech digital lending has the potential to scale quickly and is very capital efficient.
Technology players: Provide technology solutions to banks and NBFCs for rolling out an SCF product.
SCF has numerous benefits over term loans/traditional loans, which is driving investor interest --
Repeat business and large-scale collection of data: Lending is done based on invoices raised by the anchor corporate on the distributor. This helps create borrower stickiness and allows large-scale data collection on distributors and retailers, which eventually helps determine market trends and manage industry/geography-specific risks.
Low delinquency: The closed-loop financing built on a close relationship between an anchor corporate and its distributors/retailers helps result in low delinquencies.
Limited end-use prevents fund diversion: The biggest reason for defaults in MSMEs is the lack of financial discipline, as they often divert funds for personal use. In SCF, the payment is made directly to the anchor brand, restricting the end userfrom financing MSME working capital and minimizing defaults. Improved margins: SCF enables distributors and retailers to pay upfront, enabling them to avail of cash discounts, which in turn help boost their margins. There is an increased business for retailers due to working capital available via SCF.
A large part is also in terms of the support that is going to go towards derisking the MSMEs and fill-in credit gap of $230 billion in the MSME space. What's the rationale behind this bullish stance?
SCF services can enable MSME suppliers and distributors to increase their working capital and, in turn, make them globally competitive. This type of financing helps lenders extend working capital finance to MSMEs by leveraging the existing commercial relationships between MSMEs and anchor corporates. It also helps large corporates to improve their working capital management and enables financiers to assess, measure, and manage the risks of extending financing to MSMEs more effectively. As India moves towards expanding its export market, the availability of SCF for MSMEs will help significantly ease the working capital pressure and enhance its linkages to global supply chains.
What are the emerging hot springs that will give us the next crop of unicorns from this space?
Wealth tech, alternative investments and platforms focusing on distributing financial products and services to underbanked segments will be emerging segments in the future.