Supply Chain Finance_ How Digital Platforms are Helping SMEs in Tier 1 and Tier 2 Cities_Yubi

The Small and Medium Enterprises (SMEs) sector forms the backbone of the Indian economy. With an estimated number of 63 million, India has the second-largest number of SMEs in the world. They contribute to 29 percent of Gross Domestic Product (GDP) and 49 percent of exports while providing employment for over 110 million people.

The government of India plans to put SMEs on the global map by increasing their current contribution to GDP and exports. However, enabling SMEs to grow and contribute more to the economy comes with several challenges.

A large number of SMEs in the country face the hurdles of an inequitable lending structure.

SMEs in India currently face a $330 billion credit gap. A majority of SMEs, especially in Tier 2 and Tier 3 cities, do not have access to sufficient credit and liquidity required for even day to day working capital needs.

One of the key factors holding SMEs back in smaller cities is their legacy systems of operation and lack of proper technological tools to access credit. However, the widespread adoption of smartphones presents a huge opportunity for technology to make a difference in these cities. With more than 90 percent of small businesses adopting smart technologies for their businesses, there is an opportunity that digital platforms can tap with innovative technologies.

Understanding the Credit Gap 

The biggest reason for a large credit gap faced by SMEs is the reluctance of banks and non-banking financial institutions (NBFCs) to lend credit because of high perceived risks. These high perceived risks are primarily due to the financial institutions’ lack of proper distribution channels.

Lenders are reluctant to extend financing to SMEs because of the inability to adequately assess the creditworthiness of small borrowers. The lack of borrower data and profiles further exacerbates this issue.

Most SMEs are also unable to provide audited financial statements to qualify for credit. The business data presented by them is mostly haphazard and inconsistent. Such a situation does not instil confidence in lenders to transact with SMEs.

Lenders who are open to lending to SMEs are compelled to seek collateral security as a precondition to reducing the risk of default. There are however challenges in assessing the collaterals provided.

All these factors limit the number of SMEs who qualify for credit and lower the quantum of credit available. This keeps SMEs trapped in a vicious cycle of exorbitant costs, small profits and stunted growth.

The Rise of Supply Chain Finance (SCF) Solutions

Supply chain finance (SCF) is a solution that offers low-cost and more efficient financing processes for parties involved in a credit transaction. SCF provides technology-based risk mitigation techniques that can help bridge the trust gap between borrowers and lenders of credit.

There can be many ways in which SCF operates, but at its core, it helps eliminate the credit risk that comes associated with any kind of credit transaction. For example, SCF offers options that allow SMEs to access credit by using invoices and receivables as intermittent collaterals.

For borrowers, SCF opens up access to finance on the basis of who they buy from or sell to. SMEs can access larger volumes of bank credit based on the strength and volume of their actual trade transactions. SCF services can enable SME suppliers and distributors to increase their working capital, and make better strides towards expanding their presence.

With SCF, lenders like banks, NBFCs, MF’s etc. can improve their working capital management by disbursing more credit. They can assess and mitigate the risks of extending finance to SMEs since big corporations act as anchors for SCF transactions.

Innovation in Digital Platforms 

Digital platforms are revolutionising the SCF ecosystem with technology that eases the interaction between the entities involved. These platforms offer app-based financing arrangements and make the entire process of lending more efficient, agile, and transparent.

There are digital debt platforms that offer end to end digital processing of credit between SMEs and lenders with technology such as blockchain-based fraud checks, early warning signals and renewals based on conduct. With robust portfolio management solutions, lenders can get real-time risk analysis and reports for borrowers to make better and more informed choices.

With all its offerings, Supply Chain Finance solutions create an inclusive opportunity to bring more people from SMEs in Tier 1 and Tier 2 cities into the digital economy and pushes India one step closer towards making SMEs globally competitive. As the government of India plans to expand the export market for SMEs, the availability of SCF can play a significant role in achieving this ambitious goal.

With all its offerings, Supply Chain Finance solutions create an inclusive opportunity to bring more SMEs from Tier 1 and Tier 2 cities into the digital economy. Digital platforms remove geographical constraints and pave the way for SMEs to go global through innovative products and services.