Experience Next Generation Banking

A monthly publication from South Indian

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Student’s corner
To kindle interest in economic affairs... ho2099@[Link]
To empower the student community...

28th Year of Publication

 SIB STUDENTS’ ECONOMIC FORUM

Experience Next Generation Banking MAY, 2019

The South Indian Bank Ltd., H.O. : 'S.I.B. House', Thrissur, Kerala

Theme No: 330: “SUPPLY CHAIN FINANCE”

A well informed customer will make the policy makers as well as

organizations which produce goods and render services more responsive
to the customer needs. This will also result in healthy competition
among organizations and improve the quality of its products.

The “SIB Students’ Economic forum” is designed to kindle interest in the

minds of younger generation. We highlight one theme in every monthly
meeting of the “Forum”. This month the topic for discussion is
“Supply Chain Finance”

The concept of Supply Chain Finance has emerged through the globalization
of trade where the suppliers are trying to receive their payments as early as
possible while buyers are increasing their payment terms. Over the last
decade, traditional trade finance has suffered from increased costs and
complexity because of stricter compliance requirements and the introduction of
new capital rules under Basel II and III. Supply chain finance has now
surpassed traditional trade finance in market revenues. This trend is expected to
accelerate over the next three to five years. Supply chain finance is the better
option for getting an easy business loan because of the simplicity of the contract
involved. Trade finance requires a lot of negotiations due to the sheer number of
parties involved, whereas supply chain finance is a straightforward collaboration
between the supplier, the buyer and the financier.

What Is Supply Chain Finance?

Supply chain Finance is a set of technology based business and financing
processes that link the various parties in a transaction- buyer, seller and financing
institution for lowering financing costs and improving business efficiency. It has
the potential to deliver working capital to suppliers more quickly, widely and also
at lower cost. This will help small and medium-sized enterprises (SMEs), which
often have trouble in accessing working capital as Corporates are always anxious
about the financial health of the suppliers.

Supply Chain Finance is a solution designed to benefit both suppliers and buyers;
suppliers get paid early and buyers can extend their payment terms. Under SCF,

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suppliers sell their invoices or receivables at a discount to banks or other financial
service providers. In this manner the suppliers get faster access to the money they
are entitled, enabling them to use it for working capital, while buyers generally get
more time to pay.

SUPPLY CHAIN FINANCE PRODUCTS

Under the Supply Chain Finance, the products are broadly classified into

Vendor Finance
It is a facility provided to the Vendors/Suppliers who supply goods to Corporate/
Buyers. The Bank/Financier will finance the invoice accepted by the Corporate/
Buyer. On the stipulated due date, payment has to be made by the
Buyer/Corporate to Bank/Financier.

Process Flow
The Buyer (Principal/Corporate) raises a purchase order requesting a
consignment of goods and forwards it to Vendor. The Vendor ships the
consignment and initiates the request for finance by uploading the invoices
electronically on the supply chain finance platform. Once the invoices are
electronically accepted by the Corporate/ Principal, validation of the transaction
for parameters like availability of credit limit, validity of invoice, overdue
position etc. is digitally verified by the Supply Chain Finance system. On
successful validation, finance is instantaneously credited to Vendor’s operative
account. On the due date the Corporate/Principal liquidates the outstanding
invoice amount. The entire process is fully automated and featured with real time
e-alerts and e-reports which is sent to the clients at each leg of the
transaction.

Dealer Finance
The product is designed to provide financing facility to the dealers or distributors
of a particular Corporate exclusively for the purchases made from that Corporate
in the industry with significant presence and market share.

Process Flow
The Buyer /Dealer raises purchase indent requesting for the consignment of
goods and forwards it to Corporate/Principal. The indent will be uploaded by the
dealer on the supply chain finance platform. Once the invoices are electronically
accepted by the Corporate/Principal, validation of the transaction for parameters
like availability of credit limit, validity of invoice, overdue position etc. is
digitally verified by the Supply Chain Finance system. On successful validation,
finance is instantaneously created by the system and disbursement is credited to
Corporate’s operative account. On the due date, the dealer/buyer liquidates the
outstanding invoice. The entire process is streamlined and mostly automated
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with less manual intervention.

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Example of Supply Chain Finance (SCF)
Let’s say company A buys goods from supplier B. B supplies the goods and
submits an invoice to A, which A approves for payment on standard credit terms
of 30 days. If supplier B requires payment before the 30-day credit period, the
supplier may request immediate payment (at a discount) for the approved invoice
from company A’s Bank. The Bank will remit the invoiced amount (less a
discount for early payment) to supplier B. In view of the relationship between
company A and its financial institution, the latter may extend the payment period
for a further 30 days. Company A has thus obtained credit terms for 60 days,
rather than the 30 days provided by supplier B, while B has received payment
faster and at a lower cost than if it had used a traditional factoring agency. SCF
generally involves the use of a technology platform in order to automate
transactions, track the invoice approval and settlement process from initiation to
completion.

The mechanics of Supply Chain Finance

1. Buyer ordering from the Supplier

2. The supplier then fulfills the order and invoices the buyer
3. The buyer then approves the supplier’s invoices and confirms that it will pay
the financial institution for these at invoice maturity
4. The supplier sells (discounts) the invoices to the financial institution at a
predetermined discount rate
5. Supplier receives the funds
6. The buyer pays the financial institution as agreed on maturity of the invoice

THE BENEFITS OF SUPPLY CHAIN FINANCE

Benefits to buyers
 Lower cost of goods sold
 Longer DPOs (Days Payable Outstanding)
 Buyers maintain a good relationship with suppliers
 Promotes competition/ diversity in suppliers
 Allows buyers to make purchases in bulk to save costs
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 SCF doesn’t disturb existing bank relationships

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Benefits to Vendor/Dealer
 Offers steady and economical source of working capital financing.
 Immediate access to cash - Suppliers can get paid earlier than their usual 30-
day credit terms
 Improved Cash Flow visibility - Allows supplier to have the cash flow to
work on numerous deals simultaneously
 Helps provide liquidity and reduces financing costs

Benefits to Banks/Financiers
 Cost effective Customer acquisition channel
 Income from financing
 New Customers- suppliers who require financing
 Cross selling opportunities

Opportunities
 E-commerce – In line with the current trend of Indian economy moving
towards online sales from offline platforms. Corporates have a huge
opportunity to fund their supply chains through SCF. It has already taken a
major share in Mobile, Electronics & Apparels Industry.
 Integrated Approach – Opportunity to fund both forward and backward
integration along the value chain ie, Vendor Finance-Inventory Funding -
Retail Funding
 Online Platforms / Automation – Digitization enables big leverage in terms of
both integration and flow of information between the Banks & other
stakeholders.
 Potential Sectors- Focus on untapped or lesser explored industries such as
Commodities, Electricals & Electronics, Consumer Durables, FMCG & Agro-
based Industries to finance their Supply chain.

Challenges
 Acceptability and Awareness about the product among stakeholders such as
Channel partners and suppliers.
 Concentration mostly on organized industries.
 On boarding & monitoring of dealers/suppliers due to geographical spread.
 Unsecured nature of lending.
 Diversion of funds for other purposes
 Prominent Lenders still use Traditional sourcing and Assessment Techniques
 Lack of availability of a common platform for financiers.

At a time when revenues from traditional trade finance are stagnating, banks can
find opportunities to grow revenues and improve returns within each of the three
waves of supply chain finance. Much of the upside in the next three years is likely
to happen through the growth in traditional supplier and buyer led supply chain
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finance businesses, and banks must therefore focus on accelerating these at the
same time as building the foundations for the third wave of growth.

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