Data Skills to Drive Supply Chain Finance

Harshad Malhotra, Director and Head-Business, LivFinSupply chain finance is an idea whose time has finally come. And powering the growth of this relatively young segment is a new crop of Non Banking Finance Companies (NBFCs) falling in the category of supply chain finance (SCFs) companies on the lines of housing finance companies (HFCs) and asset finance companies (AFCs) that leverage domain knowledge in their respective verticals to carve out a niche of business for themselves.

Armed with big data and cutting-edge analytical skills, they are reaching out to their target business – micro, small and medium businesses (MSMEs in short) – as never before. This new-age NBFCs are also setting benchmarks in the space leveraging their specialized know-how of the nuances of supply chain finance at a granular level. Credit should be given to the Government for rolling out the uniform tax code or the Goods and Services Tax (GST) which help capture the data at each and every stage of incremental value addition cutting across the entire spectrum of the supply chain.

Since supply chain finance is a relatively new concept in India’s financial firmament, it may be in order to elucidate the concept for the benefit of the readers. In a broader sense, SCF refers to a set of technology-based business and financing processes that connect various parties involved in a transaction – be it a buyer, seller or manufacturer/producer. By connecting all the dots in the supply curve SCF companies help lower the financing cost as well as the lead time in opening a credit line. This adds to the efficiency in capital allocation leading to improved enterprise-level or firm-level business performance. Essentially, supply chain finance refers to the short-term credit line provided by financial institutions) that optimizes the use of working capital for both the manufacturers, distributors, buyers, sellers and providers, and above all, timely credit to small business at market-driven interest rates.

The future of the supply chain finance companies lies in big data and its analytics provided they put the best foot in the business forward.

Under SCF, as a norm, suppliers sell their invoices or receivables at a discounted value to financial service providers. These are called factors. In return, the suppliers get faster access to the money they are owed, helping them to use it for working capital, while buyers generally get more time to pay.

SCF market in India is estimated to be worth around $ 10billion and is expected to grow at an exponential rate. The market now remains highly fragmented with big banks and NBFCs, as expected, holding the sway. But the fledgling market is now ripe for disruptions since banks - fighting a do or die battle to resolve their bad loan issues – and conventional NBFCs – hit hard by a severe liquidity crunch – are steadily withdrawing from the space leaving the ground wide open for the agile, data-driven players with specialized domain knowledge.

Sensing opportunity in the $10 billion and rapidly growing market, many new players are crowding the space turning the market red hot as the rules of hyper-competition play out. Arguably, SCF firms with big data experience and smart analytical skills have a slew of advantages over others in the market since they could make a better assessment of credit risk and prudentially manage assets. For one, the data-driven model is essential to capture information across the value chain. This will help the new-age players to expand their digital lending ledger fast. Also, SCFcompanies can leverage customer data to drive the cross-selling of retail financial products. Further, a digital mechanism undoubtedly helps in consolidating data and enables coordinated decision-making. Ultimately, the interplay of these factors will lead to greater financial inclusion – a stated goal of the Government - and aid bringing in the underserved business community within the ambit of institutional finance.

Data-driven SCF companies also have an inherent advantage over the big players such as banks and financial institutions since they are not bound by the liquidity requirement norms nor by the rules and regulations that are applicable in the case of bank and NBFCs.

Therefore, the way forward for the specialized crop of SCF companies’ looks promising as data-driven lending is fast becoming a norm in the business. Also, the Government’s drive to promote e-commerce and cashless transactions provide a big upside for them. This also opens up new opportunities in financing both forward and backward integration along the entire value chain. Further, with online platforms becoming the new normal in business, the data enabled SCF companies can leverage their technology platform to enable information flow and integrate various sources of information on a single template. The short tenure of credit also comes for their aid by letting them do a better credit appraisal and to manage their risk better. They also can develop a template of Innovative products that are custom made for customers.

In short, the future of the supply chain finance companies lies in big data and its analytics provided they put the best foot in the business forward.