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View: Market drives SME financing


Narendra Modi recently announced that GoI will recruit 10 lakh personnel in 18 months. Interestingly, the central PSUs have close to 8.5 lakh job vacancies. Such initiatives may add some momentum in the short-term, but are artificial solutions to the unemployment problem in the long run. An organic way to revitalise the job creation process is to support SMEs, the second largest job creators after agriculture in India, which account for 45% of industrial activities that are resource and labor intensive.

However, SMEs face a critical problem that effects their very survival: funding their working capital requirements. It also puts supply chains at risk as it effects the downstream activities, that is manufacturing and sales of large companies.

Our governments have tried out several policies to solve this problem but without much success. The common approach is a quota of priority loans to SMEs. For instance, the PMMY (MUDRA) scheme introduced in 2015. The scheme has led to rising bad debts and yet not solved the fundamental problem. Technology-enabled solutions have been deployed too. A good example is the TReDS platform that enables bill discounting. The platform is still in the nascent stages with slow adoption by both large buyers and SMEs. While the government is putting great efforts into expanding its footprint, it is still not able to create seamless experiences for all the users.

Current solutions are linear — government-led and delivered through the traditional banking system. However, the application of technology and data, coupled with new business models, allows new market-driven models to evolve.

Bank-led models

Large banks (individual or consortia) can develop digital interfaces connecting all the players in the supply-chains. Such platforms can enable seamless end-to-end journeys that cover procurement, invoicing and financing. For large banks, especially the public sector, this gives an opportunity to enter the digital era.

The advantages to this model are:

  1. It allows banks to strategically play in the increasingly attractive supply-chain financing market (estimated at $2 trillion globally)
  2. It allows them to integrate with the modern supply-chains that are interconnected and digital, and
  3. It enables greater participation of the SMEs given their familiarity with the banking system.

Fintech platforms

For the common man, the term ‘fintech’ is typically associated with consumer-facing products such as mobile payment systems. However, fintech platforms, have the hunger and the technological capabilities to create innovative financial products for business customers too.

One such product is ‘dynamic discounting’ – a data-driven method for buyers to make early payments to suppliers in return for a discount on the invoices. On one hand, the platforms partner with the banks to underwrite the payments. At the same time, they provide the option to bypass the banking system since buyers can use their own surplus funds to pay the suppliers.

This model has several advantages:

1) Buyers get greater returns on their idle treasury funds as opposed to investing in traditional financial products, 2) Buyers ensure viability of their suppliers and in the process the health of their own supply-chains, and c) the suppliers free up their liquidity faster without relying on loans from banks or private lending markets.

Industry-specific niche models

Different industries have unique dynamics when it comes to supplier relationships, payment terms, and creditworthiness. Automobile firms develop strategic relationships to an extent where they invest heavily in their suppliers’ business processes and manufacturing capabilities.

On the other hand, raw materials are commodities in the cement industry. Hence, the industry operates on a cash and carry basis. Niche-systems must evolve within industries to establish financing best practices and workflows. For instance, B2B ecommerce marketplaces provide working capital solutions in partnership with banks/NBFCs. Such systems allow the suppliers to be paid instantly but allow credit to the buyers resulting in working capital flexibility.

The system is based on internal data that tracks the transaction histories of both the parties. But the same data can be used by the banks for financing decisions even beyond the platform.

It is time to move beyond one-size-fits-all methods. All the key players mentioned earlier now have the ability to create an ecosystem within which all the models can co-exist and thrive. Such an ecosystem can integrate with external systems such as ERPs, SME credit-rating systems and the GST network. These are all critical data inputs to support seamless end-to-end financing journeys. More importantly, enable flexibility, speed and contextualization to all the stakeholders.

GoI and RBI still have a major role to play as enablers. Since ‘digital’ will play an outsized role in the evolution these models, the government can help create B2B technology standards and application interfaces that allow interoperability between diverse platforms (similar to how BHIM UPI revolutionised mobile payments in the B2C space).

Regulatory rationalisation in consultation with various stakeholders is desirable. Financial institutions including fintech platforms are heavily regulated and scrutinised. While some regulations are necessary, others stifle innovation.

GoI must play a role in education and outreach by developing newer segmentation models of SMEs based on industry type, funding requirements, and capabilities. Provide them with decision making tools on how to mix and match various financing models.

(Racherla and Velamuri are professor of marketing and dean, respectively, Mahindra University, Hyderabad, Telangana)



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