Globally, digitalized businesses were able to tap SCF to weather the pandemic, but can it help ease current supply chain crises?

The COVID-19 pandemic has taught the manufacturing and other industries companies the importance of digital business continuity and resilience. We are all aware of how lockdowns can affect the global supply chain. 

Amid challenges such as labor shortages, the raw material crunch, transportation bottlenecks, and international supply chain disruptions, digital transformation continues to ease what could have been even worse impacts. 

According to Harshit Mittal, co-founder and CTO, SupplyNote (India), the focus on technology adaption has shifted from a ‘want’ to an absolute ‘need’: “With the recent spotlight on the next generation of e-commerce called quick commerce (q-commerce), the need of the hour is to be fast, efficient, and execute at scale.”

Harshit felt that while another round of global lockdown seems unlikely, businesses need to be prepared: technology integration combined with predictive analytics can help in enhancing planning and decision support systems to detect buying trends, forecast inventory shifts, and automate time-consuming warehousing operations.

Supply chain financing in India 

Harshit Mittal

As is the case in any business, working capital management is a critical facet of supply chain continuity. In India, for example, 80% of the physical supply chain is traditionally supported by micro- to small and medium- sized enterprises (MSMEs) in terms of distributors/sub-dealers/retailers. 

As MSMEs in the country lack collateral to qualify for working capital loans, they primarily rely on informal credit either through their supplier or unorganized capital providers. Both these sources of funds are expensive and unpredictable.

With more MSMEs having modernized to survive, the age-old problem of procuring working capital is now being addressed by supply chain financing (SCF), a technology that has also been modernized by AI and ML. By leveraging SCF, MSMEs can increase the amount, speed and reliability of cash flow, while financial institutions can control risks (through better tracking of financing at the unit level), keep debt ratios under control, and improve financing inclusiveness.

According to Sandeep Kakar, Chief Business Officer, Veefin: “SCF did not just survive the global shock of the pandemic; it thrived. What is certain both in India and globally is that the market is quickly transforming as organizations look for more agile and intuitive approaches to supply chain finance. Globally, SCF has been widely accepted, and its importance has increased amid the pandemic.”

Need of the hour

Globally, SCF volumes have been on the rise over the past few years but it has seen a huge uptick in India in the last two years, said Devang Mundhra, Chief Technology and Product Officer, KredX: “SCF kept the market afloat and emerged as one of the most proficient ways to improve supply chain resilience and sustainability.”

Boosted by AI, ML, blockchain, IoT and other technologies, the SCF industry is making working capital funding processes more transparent, efficient, responsive, and reactive. However, compared with global trends, the SCF penetration rate is India is much slower. It is estimated that the Indian SCF market size is approx. Rs.80,000 crore, which represents less than 5% of the entire banking system’s outstanding assets.

This gap is expected to narrow as Indian MSMEs continue to be pushed along by the tide of digitalization imperatives to survive. Mundhra concluded: “The need of the hour is a healthy collaboration of technological and human capabilities and that’s the only way to help industry overcome future disruptions.”