How a robust digital SCF infrastructure can help elevate India as a global trade leader

For the very first time, India has achieved an ambitious export target of $400 billion. Farmers, weavers, micro, small, and medium enterprises (MSME), and manufacturers have all immensely contributed to this success story, with MSMEs contributing 49 percent of the total export value. And, despite post-pandemic adversities, MSMEs have shown remarkable resilience in the global trade arena. 

However, the geopolitical issues between Ukraine and Russia have again raised concerns about the impact of the global supply chain. The ongoing crisis can present multiple challenges like delays in shipments, cancellations, damage to consignments, late receivables, etc. Indian exports of goods like pharmaceuticals, apparel, agro-products, chemicals, metals, automobiles, gems, jewellery, etc., are directly impacted presently, and the future bilateral ties and global sanctions are an overhang. MSMEs especially have been highly affected since they primarily lead exports to Ukraine and Russia. Businesses require short-term credit to meet their working capital requirements during such challenging times, and supply chain financing (SCF) is an efficient model that provides liquidity to buyers and suppliers to keep their operating cycles running.

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How supply chain financing can help bridge the MSME credit gap

SCF - from asset-backed to cash flow-based assessment

Financial institutions traditionally follow an asset-backed lending approach where borrowers have to place collaterals to avail of loans. MSMEs are usually not asset-rich, which has been a significant challenge. In the current economic scenario, lenders are taking a cognizant approach by moving from an asset-backed lending process to a cash flow-based assessment for MSMEs to help them with cross-border trades.

Lenders validate data through bank statements, past credit history, on-time repayments, and income tax returns to safeguard the rise of NPAs in the system. They also analyse alternate data like digital transactions through UPI, Point of Sale (PoS) dealings, e-invoicing, and GST data as crucial parameters to judge the borrowers’ creditworthiness.

In recent times, banks and NBFCs have started focusing on the SCF segment and are providing much-needed support to MSMEs to help them elevate and expand their horizon overseas.

Robust digital SCF infrastructure 

SCF platforms are building a robust digital infrastructure to bridge the gap between all parties. The lack of credit history and high operational costs for small-ticket size loans were the primary reasons for the reluctance in providing funding to small businesses. Fintechs are helping lenders democratise opportunities by improving cost and time efficiencies in operational processes and providing AI-backed alternate data analysis for risk assessment. And technologies like machine learning offer deeper insights into dynamic factors beyond credit scores that help lenders mitigate their risks. 

On the other side, since most MSMEs are located beyond metro cities, the awareness of SCF is relatively low. Also, these enterprises are family businesses or founder-led; they work in a traditional fashion and are hesitant towards technology adoption. Fintechs provide consultation services to help them transform into professionals. They help them strategise to scale up operations by streamlining onboarding, operational, and legal processes by integrating technology to avail supply chain financing. MSMEs are slowly recognising the value of investing in the right resources to sustain and excel in today’s globalised world.

The road ahead

Supply chain financing facilitates the inclusion of MSMEs in the mainstream lending space with the help of an accommodative regulatory framework. In the Union Budget 2022,  Finance Minister Nirmala Sitharaman announced that new enterprises could seek credit in the absence of cash flow data and assets by leveraging collateral-free Credit Guarantee Fund Trust for Micro and Small Enterprises (CGFTMSE) set up by the government and the Small Industries Development Bank of India (SIDBI). The scheme was also revamped to facilitate an additional Rs 2 lakh crore credit for MSMEs in the upcoming financial year. The announcements are significant initiatives to support domestic business activities. 

However, when it comes to global trade, the lending process is far more complex, with higher compliance requirements, and raised cost of funding. The central bank's liberalised approach to cross-border trade financing will only help MSMEs foster India’s contribution to global trade.

(This story has been updated with a new feature image)