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Supply Chain Finance: Present and Future

 In a world where the pandemic has heavily impacted supply chains, Supply Chain Finance (SCF) has emerged as a critical tool for managing risks and maintaining liquidity, particularly for small and medium-sized enterprises (SMEs). With the pandemic highlighting the vulnerability of global supply chains, the importance of effective SCF has never been more apparent. It is a crucial driver of economic growth, job creation and international trade, and its significance for businesses and the global economy cannot be overstated.

Before diving deep into SCF's challenges and opportunities for fintech in India, let's understand what SCF is, its various avatars and its products.

Key concepts

Supply chain finance (SCF) is a financial solution that allows businesses to access capital at a lower cost by leveraging their relationships with their supply chain partners. In SCF, a financing institution provides short-term credit to suppliers based on the creditworthiness of the buyer, who is the ultimate recipient of the goods or services supplied.

Benefits of SCF:


The mechanics of SCF


Understanding the value chain of SCF

  • Sourcing: Identify and select suppliers who can fulfill customer demand
  • Contracting: Establish contractual agreements between buyers and suppliers, including pricing, delivery schedules, quality standards, and other vital details
  • Procurement: Purchase goods and services from suppliers by negotiating prices, selecting suppliers, and placing orders
  • Invoicing: Generate invoices for the goods and services provided by suppliers that include details such as quantity and price
  • Invoice approval: Review and approve invoices for payment by verifying the accuracy and ensuring compliance with contract terms
  • Financing: Provide funds to suppliers based on their approved invoices to improve cash flow and working capital management and provide buyers with greater cash flow flexibility

Types of products

By and large, SCF has eight products in two categories: Receivable purchase and Loan-based products.


Receivables purchase products:

  • Receivables discounting: A financing option where a company sells its accounts receivable to a financial institution at a discount. It involves a company selling its accounts receivable to a financial institution at a discount in exchange for immediate cash while retaining the risk of non-payment by the debtor and managing the collection of the receivables
  • Forfaiting: A financing option where a company sells its future receivables to a financial institution at a discount. It involves a company selling its export receivables to a financial institution without recourse, transferring all risks associated with non-payment to the financial institution in exchange for immediate cash
  • Factoring: A financing option where a company sells its accounts receivable to a third party at a discount in exchange for immediate cash
  • Payables finance: A financing option where a company obtains funding by leveraging its accounts payable with a financial institution

Loan based products

  • Loan/advance against receivables: A type of loan where a company uses its accounts receivable as collateral
  • Inventory finance: A financing option where a company obtains funds to purchase inventory to fulfill orders
  • PO finance: A financing option where a company uses a purchase order as collateral to obtain funding for the production or purchase of goods
  • Distributor finance: A financing option where a distributor obtains funding to purchase goods from a manufacturer

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Covid-19: The great reset in SCF

The COVID-19 pandemic has caused unprecedented disruption to global supply chains, with more than 94,000 companies worldwide reporting supply chain disruptions. Traditional supply chain financing models have been exposed as vulnerable due to the heavy reliance on physical paperwork and manual processes. As a result, small and medium-sized enterprises (SMEs) struggled to secure the funds they needed, with over 80% reporting a shortage of funds during the pandemic.

The pandemic has led to a need for re-evaluating traditional supply chain financing models and exploring new innovative ways to address the challenges posed by the disruption to the supply chain. The COVID-19 pandemic has highlighted the importance of supply chain finance in managing risks and maintaining liquidity during disruption.

So why does supply chain finance become so important now more than ever?

The COVID-19 pandemic has caused disruptions in global supply chains, leading to a trade finance gap of $1.5 trillion. In India, 71% of businesses have experienced payment delays.

SCF helps businesses bridge the gap between paying their suppliers and receiving customer payments. With the global trade finance gap estimated to be around $1.5 trillion and high percentages of small businesses experiencing payment delays, the need for SCF is urgent.

India's major problem is the significant proportion of informal MSMEs. While GST has aided in bringing MSMEs to the formal sector, the number of MSMEs registered under GST increased from 6.31 million in 2017 to 10.93 million in 2020, which is still a tiny percentage of the total.

A significant chunk of MSMEs in the informal sector still maintains no books or just kutcha records which is a huge problem and an effective blocker for lenders to analyze business and give SCF through formal channels.

Kutcha book maintenance: The chronic Indian problem

As of March 2021, there are approximately 63 million Micro, Small, and Medium Enterprises (MSMEs) in India, according to the Ministry of Micro, Small, and Medium Enterprises.

A study by the International Finance Corporation found that around 74% of Indian MSMEs use Kutcha book records. Another study by the Reserve Bank of India found that only 5% of Indian MSMEs had access to traditional sources of financing. This highlights the challenges MSMEs face in accessing financing due to the need for standardization and reliability in their financial records.

Kutcha book maintenance in India leads to problems for supply chain finance

  • Lack of transparency and reliability of financial records make it difficult for businesses to access credit or financing
  • Lenders rely on accurate financial records to evaluate creditworthiness and eligibility for financing, which is challenging with kutcha book records
  • Kutcha book records also lead to a need for more standardization and consistency in financial records, making it difficult for businesses to integrate with supply chain finance programs

Standardization is critical for supply chain finance as it allows different businesses to integrate their financial records and systems quickly, making financing more efficient and accessible.

Banks do not trust; they verify!

  • Lack of visibility and control: Banks may not have complete visibility and control over the supply chain, making it difficult to assess and manage the associated risks. This may make them wary of trusting other players in the ecosystem
  • Competition: Banks may view other players in the ecosystem, such as fintech, as competitors and may be reluctant to share the market or retain the pie with them
  • Regulatory compliance: Banks may be subject to strict regulatory compliance requirements, such as KYC and AML, which they may find difficult to enforce on other players in the supply chain finance ecosystem
  • Reputation risk: Banks may be concerned about their reputation and may be reluctant to partner with or rely on other players in the ecosystem, particularly if they have a poor reputation or track record

Banks may prefer to retain the whole pie to have greater control over the supply chain finance process and minimize the associated risks. But, a famous idiom is “Jack of all trades, master of none.” For doing A to Z of SCF, banks would need to spend a lot of time and money to develop SCF infrastructure which isn't their core skill, while fintech companies can do it faster. Fintech players can also help banks expand their reach to businesses with kutcha record-keeping and scale beyond established ones.

Before we dive into future SCF models and opportunities for fintech companies, here is a quick poll for you.

Future SCF Models

The future may see a common platform similar to the PSB’s joint digital platforms or open standard ERP infrastructure like OCEN or ONDC, where the government will enable suppliers, buyers, anchors, fintech companies and banks to integrate their services to provide SCF solutions to increase standardization and reduce the fragmentation in SCF.

Four models can come into play in the future:

  • Model 1: Banks do end-to-end delivery. But this will require banks to invest both time and money
  • Model 2: Banks partner with platform providers to create seamless and digital SCF journeys through APIs and connectivity across suppliers and buyers while retaining control of the customer interface
  • Model 3: It involves nonbank platforms scaling to provide supply chain finance by linking with banks and nonbank financing providers, becoming go-to sources for invoicing data and financing but will result in banks losing control over the customer interface
  • Model 4: It involves a diverse ecosystem of supply-chain finance providers catering to different needs, with continued niche-based evolution like serving a particular industry and platforms offering self-serve management of invoices for SMEs, making it possible for all players to co-exist

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We believe that Model 3 and Model 4 will be running in tandem in the future, which presents immense opportunities for fintech to scale up and build new features according to the models. Our next section explores the possibilities for fintech companies according to models 3 and 4.

Opportunity for fintech in supply chain finance


Despite the potential benefits, the adoption of SCF in India is still limited, with challenges such as informal bookkeeping, lack of awareness, resistance to change, and fragmented supply chains hindering its widespread use.

While India, the US, and France lead in the number of SME lending with fintech, with over 10% of the share in SME lending, more is needed to address the massive financing gap faced by MSMEs in the country.

SCF presents a massive opportunity for fintech to capitalize by bridging the gap between MSMEs and access to traditional financing sources. In the following subsection, we will share insights on how fintech can close the gap between MSME's supply chain financing needs and traditional financing.

An overview of major Indian fintech players and their product offering across the receivable product portfolio


Converting Kutcha to Pakka

Converting the kutcha book to pakka book establishes formal credit history for suppliers, enabling fintech companies to provide accurate credit scores and risk assessments for better financing terms, increased transparency, streamlined financing, and better risk management through advanced data analytics and risk assessment tools. C2FO, Drip Capital, and CredAble are examples of fintech companies that have successfully implemented this approach.

  • C2FO: Enables better financing terms for suppliers by converting kutcha book records to pakka book records, generating $123 billion in working capital since 2008
  • Drip Capital digitizes financial transactions and uses machine learning algorithms to provide efficient working capital solutions to small and medium-sized exporters in emerging markets
  • CredAble grew its revenue by 300% in 3 years by converting kutcha book records to pakka book records and offering better financing solutions to small and medium-sized businesses in India
  • Khatabook and OkCredit provide mobile apps for small business owners in India to manage their credit and accounting through digital records of transactions, credit tracking, payment reminders, and bookkeeping reports

Driving SCF through anchors

The above solution can seem far-fetched right now. So fintech can drive the SCF by tying up with Anchor companies. Anchor companies and distributors are usually well-established, financially stable players that can access credit on favorable terms. On the other hand, small retailers such as mom-and-pop shops may face challenges in accessing financing due to their limited financial records and lack of collateral.

Taulia, a fintech company that provides working capital solutions to businesses, partners with large anchor companies such as Coca-Cola, John Deere, and PayPal to offer financing solutions to their suppliers. According to Taulia, their platform has facilitated over $200 billion in early payments and financing to suppliers, resulting in significant cost savings and improved cash flow for both anchor companies and their suppliers.

In India, ITC has partnered with RXIL for early payment to suppliers. HUL collaborates with CredAble for working capital solutions for distributors and suppliers. Nestle partners with KredX for early payment to suppliers.

​​Platform play: Expand product offerings across the value chain

Fintech companies can expand their product offerings across the value chain of supply chain finance by providing solutions for each stage, such as:

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Parting wisdom

According to a report by the Reserve Bank of India, the adoption of SCF solutions by banks and NBFCs (non-banking financial companies) has increased significantly in recent years, with the total SCF volume rising from $300 million in 2017-18 to $14 billion in 2019-20.

Fintech companies operating in the SCF space in India have a tremendous opportunity to tap into this growing market and provide much-needed financial solutions to SMEs.

However, fintech needs to recognize that significant regulatory and operational challenges are associated with operating in the SCF space in India. They must comply with relevant regulations, particularly those related to KYC (know your customer) and AML (anti-money laundering) requirements, and work closely with banks and other financial institutions to ensure they have access to the necessary funding and infrastructure.

All said, we expect this will not be a “winner takes all” market and that different solutions will co-exist in the future landscape. There is sufficient market breadth for multiple networks, technologies and business models to succeed. Remember, in the world of fintech in SCF in India; it's not about being the biggest fish in the sea; it's about having the most fin-tastic ideas!

Potlee: An embedded finance solution

Potlee provides embedded finance solutions at checkout for any marketplace to swiftly enable credit services for its customers, adding value to their business and enabling higher sales conversion. Integrating Potlee on marketplaces is a seamless process that can happen in just a few hours.


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Supply Chain Finance: Present and Future

Ankit Abhishek
Yatharth Chaudhary
  • January 23, 2024
Financial Ripples

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