A. About the Speaker: -
Mr. Navneet Kumar conducted this session on “Supply Chain Finance”. He is a Senior Vice President of Product Program and Corporate Coverage, Supply Chain Banking at Yes Bank Ltd.
He has completed his BCA- Bachelor of Computer Application from Vinayaka Mission’s Research Foundation- University. He has also completed his PGDM from ITM, Navi Mumbai and topped among his peers.
Coming to his experience, He has 12 years of banking experience across departments for branch banking, infrastructure, Finance group, business banking, and supply chain banking. He has also worked with HDFC Bank, Kotak bank and IndusInd Bank prior to the current role.
B. Supply Chain Finance: -
Supply chain finance – also known as reverse factoring (and abbreviated as SCF) – is a way of offering your suppliers early payment in the form of a third party-funded solution. Unlike other forms of receivable’s financing, the cost of funding for suppliers using supply chain finance is based on your credit rating, rather than theirs.
That means your suppliers will typically be able to receive funding at a more favorable rate than they can achieve independently. Supply chain finance is usually an off-balance sheet solution, although SCF programs do need to be structured in such a way that they are not classified as debt.
Supply chain finance is also sometimes used as an umbrella term to include other forms of early payment program, such as dynamic discounting. However, dynamic discounting is a self-funded solution in which buyers offer suppliers early payment in exchange for a discount. Supply chain finance, in contrast, is funded by third-party finance providers.
Purchase leg of transactions
Sales leg of transaction
Traditional supplier finance program-based approach
Traditional channel finance program-based approach
New structures of finance evolving
New sectors being covered.
A typical extended payables transaction works as follows: Let’s say the buyer, Company ABC, purchases goods from the seller, Supplier XYZ. Under traditional circumstances, Supplier XYZ ships the goods, then submits an invoice to Company ABC, which approves the payment on standard credit terms of 30 days. But if Supplier XYZ is in dire need of cash, it may request immediate payment, at a discount, from Company ABC's affiliated financial institution. If this is granted, that financial institution issues payment to Supplier XYZ, and in turn, extends the payment period for Company ABC, for an additional further 30 days, for a total credit term of 60 days, rather than the 30 days mandated by Supplier XYZ.=
C. Present Market Size: -
A supply chain loan is a popular financing method among small-medium enterprises and is growing across the globe. Backed by technology, supply chain finance programs are focused on providing safe post-shipment financing. However, the emergence of technologies such as artificial intelligence, natural-language processing and robotic process automation is likely to enhance the efficiency of this financing solution in the future.
The major points to investigate when we talk about market size of Supply chain finance are, as follows:
- SCF Market Size: ~INR 1300 Bn + ($18.3Bn)
- YoY growth of 25%
- Predominantly unsecured
- Most of the leading Pvt. sector banks offers SCF. Gaining attraction with Public Sector Banks too
- Dominated by Channel Finance
- Supplier/Vendor Finance offers huge growth potential
- Major Segments: Auto (> 70%), White Goods, Steel, Argo, FMCG, Textiles, Retail etc.
- Non-Auto Dealer Finance gaining popularity
- Growing acceptability of other segments
- Various IT platforms supporting the ecosystem
- SCF volumes poised to grow due to higher awareness, new entrants, and technology-based disruptions.
D. Supplier Finance: -
As we had a good discussion about supply chain finance and present market size, thing which is crucial part of supply chain finance and it plays important role in maintaining or improving the cash flow and operations of multiple companies. It plays important role for many companies to get the credits so that they can buy goods which will help them in growing business.
This terminology is preferred by many manufacturing companies as well product distributors and it helps them buy raw materials so that they can grow their business and can also maintain inventory whenever required.
How does Supplier financing work?
- When a company partners with a supply chain financing company which basically acts as a intermediary between the company and the supplier of company then the finance company plays a crucial role in buying goods from the suppliers along with the credit accommodations.
- If a company is looking forward to buy new product then company will place the order with supply chain financing company and then the supply chain finance company will place the purchase order with supplier accordingly.
- Financing company will extend the credit to company and it handles the supplier payment directly.
- The last process which is involved in the process is that, finance company sends invoice for the products that are being shipped or supplied.
Criteria for supplier financing?
Supplier finance is basically available to both small as well midsized companies which meets the following criteria:-
- Manufacture or distribute goods.
- Atleast 3 years of operations.
- Annual revenue of minimum two million dollars.
- Should be good in providing accurate financial statements.
- Should have product liability insurance.
Advantages of supplier financing:-
The biggest advantage of supplier finance is that it manages well with almost all the types of financing. Additionally it have following advantages:-
- Invisible to clients.
- Friendly to suppliers.
- Easy to implement.
- Available on an “as-needed” basis.
- Available to small and midsize companies.
Limitations of supplier financing:-
- It only covers costs of buying products or raw materials.
- It only helps up to the credit insured.
Growing significance of new structures:-
Factoring solutions for receivables From Dealers
Tier 2 Funding
Program for Buyer Finance
Collaboration with Fintech
Co Funding with Fintech
E. Channel Finance: -
Channel financing is a structured programme through which the bank offers short-term working capital facilities to the supply chain stake holders i.e., buyer and the supplier. For example, if the large corporate must get the supply of raw material from the MSE vendors in a seamless way, the vendors also want to get the payment on due date so that they may not feel the pinch of liquidity of funds.
Further if the corporate wants to enhance the sales of its product, it will have to facilitate its dealers/distributors so that they may not face any problem in making the payment to the corporate on the due date or at least just after the sale of the goods. Channel financing helps the stake holders to sustain a seamless business flow by avoiding any difficulties relating to working capital which are mainly delay in getting the payment from the buyer to the supplier.
Definition of Channel Financing :
- Channel Financing is an innovative product to extend working capital finance to dealers having business relationships with large companies in India. This may be in the form of either cash credit facilities or as a bill discounting line of credit.
- Thus, in channel financing, the financing bank takes care not only of the corporate manufacturers but also his supplier and the dealer/distributor. Here this is pertinent to note that in case, the supplier, or the distributor of the goods to the corporate is competent to arrange their own funds for total requirement, then there is no need for channel financing product.
- Therefore, this product of financing arises only when the supplier or the distributor is not able to meet its requirement of funds from their own sources for from their own bank due to any reasons and the corporate manufactures wants to help him so that he may get the seamless supply and seamless realization of book receivables from the distributors/dealer.
Products under Channel Financing :
- Banks provide different types of products under channel financing depending on the requirement of the business enterprise specifically these are either overdraft/ cash credit or usance bill discounting.
Ways in Which Channel Financing Facilitates Supply Chain Management :
- Boosts Cash Flow
The direct impact of availing channel financing is that it helps to boost the cash flow in a business. When a supplier benefits from channel financing services, it enables them to receive early payments and at the same time allows buyers to delay the same until maturity. This timely access of funds protects supply chain activities from any fluctuation in demand.
- Helps to Manage Inventory Better
Besides facilitating ease of accessing funds to boost cash flow, channel financing also helps businesses maintain and optimize inventory.
For instance, when you have access to accelerated cash flow, you can invest in better quality raw material and avail innovative solutions to forecast demand patterns in the business. Such an endeavor further allows you to build a responsive ecosystem of the supply chain.
- Makes Working Capital Cycle Shorter
A shorter payment cycle comes in handy for businesses in more ways than one. However, the most important benefit is that it helps companies maintain inventory and keep operating activities smooth.
But as a supplier, when you opt to provide goods and services on credit to customers against longer payment dates, it creates pressure on your working capital.
Nevertheless, with channel financing, you can easily access funds as and when required to keep your operations smooth and shorten your working capital cycle successfully.
- Promotes Steady Growth
As a business owner, you are already aware of the role and significance of working capital. You are also quite familiar with the struggles when working capital fails to meet operating expenses to keep daily activities smooth flowing.
However, the USP of channel financing is to extend substantial funds to businesses and replenish their working capital. Having adequate working capital helps keep daily operations active and helps to seek growth-based opportunities without straining cash flow.
- Facilitates Collaboration Between Suppliers and Buyers
Ideally, within a supply chain, the buyer wants to hold back payment until maturity to optimize cash flow. On the other hand, suppliers look for quick cash conversions.
Their differences in trade objectives often slow down the conversion cycle and prompt inconsistency in the supply chain. But with channel financing, you can quickly get rid of such discrepancies in payment and increase business cash flow.
This allows you to supply goods and services to your clients on credit without widening the gap in your working capital.
- Bottom Line
With the help of channel financing, processes like procurement of raw material and payment have become faster. As a result, despite the difference in trade objectives, the supply chain can now maintain its cash flow in business successfully and improve the quality of operations with ease.
F. Digital Disruption: -
Digital disruption is the change that occurs when new digital technologies and business models affect the value proposition of existing goods and services. The rapid increase in the use of mobile devices for personal use and work, a shift sometimes referred to as the consumerization of IT, has increased the potential for digital disruption across many industries.
Generally, digital disruption happens after a digital innovation, such as big data, machine learning (ML), internet of things (IoT) or the bring your own device (BYOD) movement. Digital innovation then affects how customer expectations and behaviors evolve, causing organizations to shift how they create products and services, produce marketing material, and evaluate feedback. This shift in digital strategy can occur on an individual, organizational, industry or societal level.
The term digital disruption has become something of a cliché in recent years and is often misused to describe any product involving digital technology or the use of digitization to better compete against marketplace peers. It is often confused with the term disruptive technology, a term coined by Harvard Business School professor Clayton M. Christensen to describe a new technology that displaces an established technology.
Examples of Digital Disruption :
A few examples of digital disruption include
- The digital camera business disrupted the industry of film photography and photo processing.
- The subscription economy business model, as used by companies like Amazon, Hulu, and Netflix, caused a disruption within the media and entertainment industries by changing how content is accessed by customers and monetized by advertisers.
- Freemium products, such as Spotify, LinkedIn, or Dropbox, that allow users to sample a basic product with the option to pay for the full offer, put more emphasis on developing a well-known brand behind a product or service.
- On-demand services, like Uber, have disrupted more traditional services like taxis.
- The rise of electronic reading has redefined the print and publication industry.
Importance of Digital Disruption :
- It is important for organizations to embrace digital disruption in order to gain a competitive advantage. When an industry experiences digital disruption, it typically signals that consumer needs are shifting. Therefore, understanding the disruption allows companies to keep existing customers happy as well as create opportunities for new customers.
- It also gives companies a better idea of human behavior and how trends may occur over time. A few best practices to follow that ensure digital disruptions are more of an opportunity than a threat is,
- Pursue initiatives that might cause a disruption, do not be afraid to be the disruptor. Consolidate data assets and use them to make decisions. Brainstorm ideas for entirely unique products, services, or channels. Employ customer data in new, innovative ways.
G. Banks Vs Fintech :-
The banking industry has greatly evolved from the use of loans of grains as collateral in ancient Babylonia and Assyria. If we were to go back to the period before technology innovations, the banking systems would catch us off guard. More technology innovations are occurring every day, resulting to new banking methods, other than traditional banks. Most traditional banking systems are also backed by Fintech and Fintech products. Although fintech is commonly viewed as a disruption to the banking industry, the benefits cannot be matched. In this article, we discuss the differences between fintech and banks.
What is Fintech?
- Fintech, short of financial technology, is a term used to describe new technology that automates and improves the delivery of financial services. It uses algorithms and specialized software on computers and smartphones and is used to manage financial processes, operations and lives by consumers, business owners and companies. An additional component of fintech is the development of cryptocurrencies.
- Fintech has now shifted to more consumer-based services and is now used in various sectors including retail banking, education, investment management and non-profit, just to name a few. Among functions which incorporate fintech include depositing cheques with smartphones, money transfers, managing investments, applying for credit and any assistance that do not require a person but uses technology.
- Crowdfunding platforms such as GoFundMe and Kickstarter- These allow app and internet users send and receive money.
- Budgeting apps
- Digital cash and cryptocurrencies
- Smart contacts which automatically executes contracts between sellers and buyers
- Open banking
- Insurtech- This aims to streamline and simplify the insurance industry
The trend towards increased information, mobile banking, decentralized access, and accurate analytics has created opportunities for consumers, B2B and B2C to lean towards fintech services.
What are Banks?
These are financial institutions that is licensed to accept deposits from its customers and make loans. Although there are different kinds of banks including investment banks, retail banks and corporate banks, they are regulated by the central bank or the national government.
The importance of banks in the economies cannot be ignored. Through different account types, customers can carry out transactions including routine banking transactions such as withdrawals, deposits and bill payments not to mention the ability of customers to earn interest on their investments as well as save and borrow money. Banks also provide currency exchange, wealth management and safe deposit boxes.
Differences between Fintech and Banks
Fintech is a term used to describe new technology that automates and improves the delivery of financial services. On the other hand, banks refer to financial institutions that is licensed to accept deposits from its customers and make loans.
While fintech companies focus on making the customer experience seamless through convenience, functionality, personalization and accessibility, banks focus on security and the management of financial risks.
- Potential coverage
Due to the use of technological trends and advancements such as smartphones, fintech has a larger market distribution. On the other hand, banks have a limited market distribution.
Fintech has organizational structures with fewer barriers to trends which encourages innovation. On the other hand, banks have a rigid organizational structure that may restrict quick rolling of innovation changes.
- Technological reliance
While fintech companies rely heavily on technology, banks do not rely heavily on technology advancements.
- Target customers
While fintech targets the unbankable such as those with low credit ratings, banks target customers with proven track records as well as strong credit ratings.
FinTech has lenient and flexible collateral requirements. On the other hand, banks have strict collateral requirements.
H. Trade Receivables e-Discounting System :
- TReDS is an electronic platform for facilitating the financing / discounting of trade receivables of Micro, Small and Medium Enterprises (MSMEs) through multiple financiers. These receivables can be due from corporates and other buyers, including Government Departments and Public Sector Undertakings (PSUs).
- TReDS is a payment system that has been authorized by the PSS Act. It's a platform for uploading, accepting, discounting, trading, and settling MSMEs' invoices/bills, as well as factoring both receivables and payables (reverse factoring). MSME vendors, corporate and other purchasers, including Government Departments and PSUs, and financiers (banks, NBFC-Factors, and other financial institutions, where approved) are all direct participants in the TReDS, with all transactions executed "without recourse" to MSMEs.
- Initially, three entities were authorized to operate TReDS. To encourage innovation and competition through increased participation, 'on-tap' authorization was introduced in October 2019. New players would be authorized considering the merits of the proposal and assessment of potential for additional entities.
Participants under TReDS System
- Direct participants in the TReDS include MSME sellers, corporate and other purchasers, including government departments and PSUs, and financiers (including banks and NBFC factors). TReDS provides a platform for various participants to interact to facilitate the uploading, accepting, discounting, trading, and settlement of MSMEs' invoices and bills. If necessary, sellers' and purchasers' bankers may be granted access to the system in order to get information on their customers' portfolios of discounted invoices / bills. TReDS may form partnerships with technology providers, system integrators, and companies that provide dematerialization services in order to provide its services.
TReDS Platform registration process
- Complete the online application form.
- The TReDS Platform will contact the buyer and deploy their representatives to continue the conversation the procedure for registering
- The buyer must register/synchronize their bank account with the TReDS platform for the transaction to be completed. At the end of each transaction, the amount can be automatically deducted.
- The TReDS Platform sends the checklist and other application forms that must be completed before the registration process can begin. The KYC Documents of the Applicant Entity and the promoters/administrators/authorized signatories, among other documents, are necessary for registration.
- The buyer must collect the relevant documentation and mail them to the TreDS Platform in concern.
- The TReDS Platform charges an upfront registration fee, which is usually based on the buyer's size. This is a one-time, non-refundable fee that must be paid at the time of registration.
I. Snapshots: -
J. Report By: -
Above report is written by Mr. Akshay Gopal the first-year student of Operations & Supply Chain Management department of ITM Business School, Kharghar, Navi Mumbai.