Role of data and technology in transforming supply chain financing in India

The Indian MSME sector is a vital driver of the economy, accounting for around 30% of the country’s GDP and employing over 11 crore people, according to a 2022 report on MSME lending by BLinC. However, MSMEs have traditionally faced challenges in accessing finance due to their size, lack of collateral, and fragmented nature. This has hampered their growth and ability to compete in the global market.

Supply chain finance is a financing solution that can help MSMEs overcome these challenges. It provides short-term financing to suppliers based on their invoices, which can help them improve their cash flow and meet their working capital needs.

Data and technology are transforming the supply chain financing landscape, making it easier and more affordable for MSMEs to access the capital they need to grow. 

Here are some of the ways in which data and technology are transforming supply chain financing and benefiting the MSMEs in India:

Improved credit assessment

Data is the new gold, and it is playing a critical role in transforming supply chain financing. By collecting and analysing data on MSMEs, lenders can gain a better understanding of their creditworthiness and risk profile. For example, data analytics can be used to assess an MSME’s historical financial performance, order book, and customer base. This information can be used to create a more accurate credit score, which can help lenders make more informed lending decisions and offer more tailored financing solutions that meet the specific needs of MSMEs.

Automated decision-making

With such available data, technology is being used to automate the underwriting process for supply chain financing. This can free up time for lenders to focus on other tasks, and it can also make the process more efficient for MSMEs. For example, lenders can use software to automatically review and approve SCF applications based on pre-defined criteria.

Real-time risk assessment

Data and technology is a great combination used to assess risk in real time. This allows lenders to make more informed decisions about whether to extend credit, to what extent credit has to be extended, and what is the ideal credit period which benefits the vendor, distributor, dealer and/or retailer. This, in turn, helps to adjust the terms of financing as needed.

Improved supply chain visibility

Supply chain visibility is a very big risk mitigator. Data and technology improve visibility and are hence great enablers in quick decision-making. This allows lenders to track the movement of goods and services, and to identify potential risks and disruptions. This information can be used to mitigate risk and to ensure that MSMEs have the financing they need to meet their obligations.

Improved access to capital

With the right decisions made by lenders in a quick turnaround time, using data and technology can help MSMEs improve their creditworthiness and risk profile, which can make it easier for them to access capital from lenders. Such capital gives the customer better bargaining power when it comes to a) the sale the customer is looking to conclude, or b) the purchase the customer intends to make. This stands well with the phrase—"Cash in hand is a better strength for bigger profits”. 

Increased efficiency

We all agree that time is more precious than money. Data and technology help improve the efficiency of the financing process, which can save both lenders and MSMEs, time and money.

Reduced costs

Data and technology can help to reduce the costs of financing for MSMEs, as lenders can automate the underwriting process and assess risk in real time. For example, lenders can use data analytics to identify MSMEs that are at a lower risk of default. This can help lenders to reduce their lending losses, which can lead to lower interest rates for MSMEs.

Enhanced relationships with suppliers/buyers

Data and technology help MSMEs build stronger relationships with their suppliers/buyers, as they can better track the movement of goods and services and identify potential risks and disruptions.

The future of supply chain financing in India is bright. While the use of data and technology in supply chain financing is still in its early stages, it has the potential to revolutionise the way MSMEs access capital. By improving access to data, automating the underwriting process, assessing risk in real-time, and improving supply chain visibility, data and technology can help to make supply chain financing more accessible, affordable, efficient, and give a boost to the growth of the MSME sector in India.