Rahul Ghule, Head Sales – Supply Chain Finance, Profectus Capital articulates the business scenario for SCF:
Ravi Lalwani: Post covid, how is the SCF business faring compared with other businesses for SME customers?
Rahul Ghule: The impact of covid, resultant fluctuations (upward/ downward) in demand in various sectors, and the consequent disruptions in most supply chains have created a mixed effect as far as SCF business is concerned. Mobile phones, IT hardware, and e-commerce were in huge demand and short supply due to lifestyle changes ushered in by covid, leading to shorter repayment cycles. faster payback cycles significantly reduced the risk levels and made these sectors attractive.
With covid tapering off, the focus in SCF is to consolidate the presence in these sectors, especially IT hardware and e-commerce, as well as to expand to other industries such as medical equipment and printing & packaging, to build synergies with our other retail funding LOBs.
What trends have you seen in the evolution of supply chain finance products?
We see 2 most important trends evolving in SCF. (i) Deep Tier Financing / Tier 2 Financing: Traditionally, banks and NBFCs have primarily focused on tier 1 lending, be it on the distribution or supply sides. Higher risks than tier 1 characterize tier 2/3 opportunities on both sides of the supply chain, which however are balanced by lower ticket sizes and higher returns. Tier 2/3 opportunities have not been exploited, and the opportunity size is humungous.
(ii) Financing opportunities with new-age aggregator companies: Many industry sectors are witnessing mushrooming of tech-based aggregator platforms, which not only help improve the capacity utilization of MSME vendors but also play the critical role of providing immediate liquidity to the MSME, something which large corporate buyers don’t offer. Such aggregators are also evincing much interest from PE players, and the multiple rounds of funding afford such aggregators enough time to scale up.
We are also keenly observing ONDC (Open Network Digital Commerce) as a significant space, which is expected to rewrite how MSME sellers compete with e-commerce giants. ONDC is bound to become a huge consumer of SCF products.
Which geographies and industry segments are you targeting for expansion?
We have extensively studied and focused on healthcare, pharmaceuticals, chemicals, plastics, food, food processing, auto ancillaries, hospitality, educational institutions, printing, packaging, textiles, readymade garments, engineering and machine tools. Profectus Capital continuously observes and studies other sectors for substantial growth and sustainability indicators. Apart from the above sectors, we are intensely focused on e-commerce and IT equipment & hardware. In both these sectors, we have invested heavily and has tied up with Amazon, Flipkart (E-Commerce), Ingram Micro, Savex, Supertron, and Rashi Peripherals. We have 24 full-fledged branches across the country, from tier 1 cities to tier 3 towns. The active geography of each of these branches may extend from 25-150 km depending on the market potential.
What data elements are increasingly becoming important to drive SCF?
Monitoring the movement of stock and receivables is critical to SCF. Therefore, it has become increasingly vital for financiers to find an economical and simple way to integrate their systems with the ERP systems of the corporates and MSMEs. Further, instead of assessing an MSME enterprise only at annual intervals, it is essential to conduct micro assessments regularly – monthly or quarterly. Getting banking and GST data through the account aggregator framework is the way forward to monitor the MSME SCF borrowers.
What is the likely growth of SCF in the country in the next 3 years?
The SCF opportunities are bound to grow multi-fold in the 3 years horizon due to these critical factors.
- Elongating cash conversion cycle times are likely to significantly contribute to higher scope and demand for SCF products.
- With more and more financiers looking at tier 2/3 opportunities positively, increasingly more layers of MSMEs would be funded under the SCF route, thereby providing a multiplier effect to the consumption of SCF products.
- Many independent SCF platforms have sprung up and are propagating SCF culture to corporate & mid-corporate ecosystems, which have traditionally sold their output by offering credit to their dealers & distributors.
- With NBFCs now being permitted to participate in TREDS exchanges, the exchanges would now be keen to attract slightly lower-rated corporate buyers to their platform, thereby further contributing to the further proliferation of SCF products. Considering the above factors, the supply chain finance products will likely see 35-50% growth during the next 3 years.
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