However, SMEs face a serious problem that affects their survival: funding their working capital requirements. It also puts supply chains at risk as it affects downstream activities, i.e. manufacturing and selling of large companies.
Our governments have tried many policies to solve this problem but without much success. The general approach is a quota of priority loans to SMEs. For example, PMMY (Posture) scheme launched in 2015. The scheme has added to the mounting debt and yet has not solved the fundamental problem. Technology-enabled solutions have also been deployed. A good example is the TReDS platform which enables bill discounting. The platform is still in its infancy with slow adoption by both large buyers and SMEs. While the government is making great efforts to expand its footprint, it still hasn’t been able to create a seamless experience for all users.
Current solutions are linear – led by the government and delivered through the traditional banking system. However, the application of technology and data, along with new business models, allows new market-driven models to be developed.
bank led model
Large banks (individuals or consortiums) can develop digital interfaces connecting all players in the supply-chain. Such platforms can enable a seamless end-to-end journey covering purchases, invoicing and financing. For large banks, especially the public sector, it presents an opportunity to enter the digital age.
The advantages of this model are:
- This allows banks to play strategically in an increasingly lucrative supply-chain financing market (estimated at $2 trillion globally).
- This allows them to integrate with modern supply-chains that are interconnected and digital, and
- It enables greater participation of SMEs by being familiar with the banking system.
fintech platform
For the layman, the term ‘fintech’ is generally associated with consumer-facing products such as mobile payment systems. However, fintech platforms have the appetite and technological capabilities to create innovative financial products for business clients as well.
One such product is ‘Dynamic Discounting’ – a data-driven method for buyers to make early payments to suppliers in exchange for discounts on invoices. On one hand, the platforms partner with banks to underwrite payments. Also, they provide an option to bypass the banking system as buyers can use their own surplus funds to pay suppliers.
This model has several advantages:
1) Buyers get a higher return on their passive Treasury funds as opposed to investing in traditional financial products, 2) Buyers ensure the viability of their suppliers and the health of their supply-chains in the process, and c) Suppliers free up their liquidity faster without relying on loans from banks or private lending markets.
industry-specific niche model
Different industries have unique dynamics when it comes to supplier relationships, payment terms and creditworthiness. Automobile companies develop strategic relationships to the extent that they invest heavily in the business processes and manufacturing capabilities of their suppliers.
On the other hand, raw material is a commodity in the cement industry. Therefore, the industry works on the basis of cash and carry. Niche-systems must evolve within industries to establish funding best practices and workflows. For example, B2B ecommerce marketplaces offer working capital solutions in partnership with banks/NBFCs. Such systems allow suppliers to pay promptly but allow credit to buyers resulting in working capital flexibility.
The system is based on internal data that tracks the transaction history of both the parties. But the same data can be used by banks to finance decisions beyond the platform as well.
It’s time to move on from one-size-fits-all methods. All the major players mentioned earlier now have the potential to create an ecosystem within which all models can coexist and thrive. Such an ecosystem can be integrated with external systems such as ERP, SME credit-rating system and GST Network. These are all critical data inputs that support a seamless end-to-end financing journey. More importantly, enabling flexibility, speed and relevance to all stakeholders.
Government of India and reserve Bank of India Still have a major role to play as promoters. As ‘digital’ will play a bigger role in the development of these models, the government can help create B2B technology standards and application interfaces that allow inter-operability between different platforms (similar to BHIM is i revolutionized mobile payments in the B2C sector).
Regulatory rationalization is desirable in consultation with various stakeholders. Financial institutions, including fintech platforms, are heavily regulated and scrutinized. While some regulations are necessary, others prevent innovation.
The Government of India should play a role in education and outreach by developing new segmentation models of SMEs based on industry type, funding requirements and capabilities. Provide them with decision-making tools on how to mix and match different financial models.
(Racherla and Velamuri are Professor and Dean of Marketing respectively at Mahindra University, Hyderabad, Telangana)