By Archit Gupta, Founder & CEO, Clear
Trade financing or invoice discounting transactions are one of the lowest-cost credit
instruments available to large supply chain participants across the world. However these
instruments have not grown in India, largely because transactions are operationally heavy for both the corporate (or borrower) and the lender. They require deeper diligence than traditional credit instruments as in a typical discounting process, the lender needs to do due diligence on multiple documents within the supply chain, right from purchase orders, and sales returns/rejections to invoices and reconciliation with bank statements.
Setting up supply chain financing lines for a lender is a long process as it requires the lender to analyse the strength of the nodes within the supply chain network, and factor in supplier performance risk and this is over and above what is done for regular business loans. These complexities make it a high lead-time activity. This financing instrument is often time-sensitive for the borrower and due to these complexities, often supply chain partners are disappointed as they are not able to meet cash flow requirements on time.
This status quo is bound to be disrupted given that in current times supply chains create a lot of digital footprints, making it possible for lenders to speed up their diligence processes. This is possible by pivoting on alternative data sources for completing their diligence both for underwriting and transaction processing. Government-created GST infrastructure is the richest source of B2B (business-to-business) data that exists currently and has the potential to be the primary source for driving this whole transformation. The following section covers various steps in supply chain financing transactions and how they can be disrupted with GST Data:
Underwriting the business
The process starts with underwriting the businesses that are part of the supply chain under consideration of the lender. Typical processes would include an analysis of how long the company has been operational, revenue, growth rate, and diversification of both customers and suppliers. Lenders would do extensive diligence by going over financial statements, supply chain partner interviews, site visits, etc to complete the process. GST infrastructure provides all these data points in near real-time and with one consent can be at the disposal of the lender. All sales of the company flow into the taxation database on a monthly basis which can be used to analyse what is current sales and how it has been growing. Additionally, since GST is transaction-based taxation, it gives details of who supplies and buys from the company under consideration.
These data points can be used to see how the participants of the supply chain are changing
over time (either customers or material suppliers). Since all these data points are available
digitally, a central system that consumes these large data sets can run a rule engine to create credit decisions on real-time data with the need to do person-based diligence only in cases that are extremely high risk.
Limit Allocation
Once a lender gets confidence in the business by underwriting the customer, the next step is to assign limits. Limit allocation often takes input from the actual cash flows of the business. With the deepening of banking data and the implementation of an account aggregator framework, it is now possible to do this process digitally. When the right system is implemented, it can analyse the sales data via taxation inputs, reconcile them with actual banking transactions to compute actual cash flows, and classify them as operational cash flow or others. Operational cash flow is the most important parameter for limit allocation and this mechanism can process it without manual intervention. Additionally, rule-based and system-driven decision removes any kind of individual biases that come up in people-based processes, making the system fairer and policy lapses virtually non-existent.
Transaction Processing
For discounting a transaction, diligence is done on actual trade instruments. This diligence often involves multiple steps like checking the authenticity of the purchase order or invoice, and acceptance of the instrument by the counterparty, i.e. if the vendor has provided the instrument it needs to be validated by the buyer and vice-versa.
Often this diligence was being done by people on the Lender side, but in the current scenario, this process can be fully managed by technology. With companies implementing enterprise resource planning (ERP) software, these instruments are available in digital format and lenders instead of taking physical copies can directly take feed from ERP, and that data would not require further diligence. Additionally, e-invoicing infrastructure within GST can act as another source for consuming this validated data. With these data feeds, the whole diligence leg could be converted into a rule engine that can or rejects a transaction without the involvement of the lender's operations staff. With these feeds, same-day processing of transactions from the time of request by either buyer/seller is possible.
While the above-mentioned alternate data sources can speed up the whole journey and make it more reliable and customer-centric, it is not very easy to implement. ERP systems of corporations are complex, processes are different and lenders have a very different stack which further increases the complexity. A simpler option for lenders is to find and partner with FinTechs who have deep expertise in taxation stack, supply chain processes, and expertise in ERP integration.
With this expertise, lenders can run a customer-centric digital experience for supply chain financing and also increase the utilisation of their credit lines which often remain under-utilised as current systems break when handling larger volumes. Supply chain financing is on the cusp of disruption and with the GST and Account Aggregator stack deepening, it is only a matter of time before lenders operate with these alternate data points to underwrite limits and process trade financing transactions.