L&T FINANCIAL SERVICES WHOLESALE-SUPPLY CHAIN FINANCE Submitted ByNishtha Kapoor (PRN No 17020241058)MBA-IB (2017-19)Symbiosis Institute of International Business Under the guidance of Name of the Project Guide with designation Anuja Nair –Division Head (West)-Wholesale Supply Chain Finance Name of the Faculty mentor -Neha Patvardhan DECLARATIONI, Nishtha Kapoor hereby declare that the project report entitled “Supply Chain Finance in LTFS: An Overview and Way forward” submitted by me to L&T Financial Services in partial fulfillment of the requirement for the award of the degree Post Graduate Diploma in Management from Symbiosis Institute of International Business (SIIB), Pune, is a record of bonafide project report carried out by me under the guidance of Ms. Anuja Nair.
I further declare that the work reported in this project will not be submitted, either in part orfull, for the award of any other degree or diploma in this institute or any other institute oruniversity and the report will be used as a part of my academic requirement only.ACKNOWLEDGEMENTThe satiation and euphoria that accompany the successful completion of project would be incomplete without the mention of few people who made it possible.I would like to extend my sincere gratitude towards organisation L&T Financial Services, the Wholesale Supply Chain finance group and the whole Supply Chain Finance Team for giving me the opportunity to be part of their team and get this learning opportunity.I would like to thank my mentor Ms. Anuja Nair for the continuous guidance, support and constant guidance throughout the project. I would also like to thank our team member like Monish Kamdar of the team as well who took out time to explain the process and help me understand the functions of various departments.Secondly, I would like to extend gratitude to my faculty advisor Ms. Neha Patvardhan, Assistant Professor- Finance, Symbiosis Institute of International Business for the continuous encouragement and guidance in all steps of internship.
S.No Particulars Page No.1 Executive Summary 5-62 Organisation Profile 3 Introduction to Supply Chain Finance Evolution and Sector analysis PESTEL Analysis of SCF 4 Industry Analysis Global Outlook Indian Outlook 4 Objective of Project 5 Methodology followed 6 Analysis and findings/results Comparative analysis of SCF in LTFS, Banks and Fintechs SWOT Analysis of SCF in LTFS Company analysis Key drivers in success of Supply Chain Finance 7 Interpretations followed by conclusions and recommendations 8 Limitations of study 9 References 10 Appendices EXECUTIVE SUMMARYSupply Chain finance (SCF) is increasingly becoming an important topic in treasury. Supply Chain Finance Programmes have gained heightened attention in business environment as the working capital and risk management have become important to the firms. SCF industry is undergoing a rapid growth with the increasing demand and interest but the problem lies in lack of awareness for corporate practioners, many of them are not able to keep up with the evolution occurring in the space. The current economic climate is forcing many companies to better manage liquidity and strengthen their balance sheet.
Supply chain finance can be an attractive way for companies to improve their working capital position. The key concept behind SCF is to provide suppliers with access to advantageous financing facilities by leveraging the buyer’s stronger credit rating. The principal reasons for implementing a SCF program include working capital optimisation, supplier liquidity needs, supplier relationship improvement, supply chain stability improvement, additional revenue, cost reductions, utilising cash surplus and optimising corporate finance.In wholesale supply chain finance programme, L;T Financial services deals in Dealer Finance and Supplier finance majorly. Earlier company was also part of E-commerce Seller finance but now the company has discontinued the operations of E-commerce seller finance. Dealer finance –It involves financing dealers, distributors and stockists. Inventory finance limit is based on a rotating tenor. The finance is to be used exclusively for purchases of goods manufactured by the company of which the borrower is a dealer or distributor.
It helps them gain easy access to finance that can help them meet their working capital requirements. This puts purchasing power back in the hands of the dealer or distributor and helps manufacturer build robust distribution networks. Vendor finance is a bill discounting facility that gives suppliers working capital finance.
Company ensures the most competitive interest rates that normally possible through conventional cash credit-based working capital limits. So now as a borrower, you won’t need to spend time looking to meet your working capital requirements. In E-commerce seller finance, their collaboration with top online market places in India has helped us understand and design our products for providing seller finance in E-Commerce sector. This product helps us to address the working capital purchasing requirements of a merchant or manufacturer selling products through online market place and increase purchasing power.
It helps E-Commerce portals to source a diverse range of products for its end customers. Various risks in the supply chain include performance risks (e.g., when the supplier delivers products with below par quality), credit risk (e.g., possible default of the borrower), warehousing risk (e.
g., inventory losses, theft, fraud), transport risk (e.g., breakage, losses, accident). In recent years there has been a shift toward digitization and automation of both supply chain finance transactional flows and supply chain financial solutions.
Leveraging the wide range of trade and transactional data, rapidly growing technology platforms are now playing a crucial role in increasing transparency by providing risk profiling credit information for banks to gain a larger share of the market. Strategies recommended in this study are with respect to product, technology and the efficient loan origination and management system. Additionally, study includes detail understanding of an initiative started by RBI called as Trade Receivables Discounting System (TReDS) to facilitate MSME receivables payments from Corporates. The main objective of the TReDS platform was to address critical needs of MSMEs ie. the twin issues of promptly en-cashing receivables and eliminating credit risk. The platform enables discounting of invoice /bill of exchange of MSME against the large corporates, including Government departments and PSU’s, through an auction mechanism to ensure prompts realization of Trade receivables at competitive market rates.ORGANIZATION PROFILE L;T Finance Holdings Ltd.
is a NSE and BSE listed company and is also registered with RBI as an NBFC and CIC. It conducts its financial services businesses through various subsidiaries. L;T Financial Services is the brand name of L;T Finance Holdings Ltd.
The company has built a strong portfolio across different areas in finance and aims to provide best solutions to the requirements. Mr. Dinanath Dubhashi is the Managing Director and Chief Executive Officer of L;T Financial services.
Mr. Virendra Pankaj is the Chief Executive-Wholesale Finance department. In FY 2017, LTFH launched a four year strategy roadmap in order to maximize shareholder returns The singlemost important metric chosen by the company deliver is Return of Equity (ROE). Company’s star product include Rural segment( Two-wheeler finance, farm equipment finance and micro loans), Housing finance, mutual fund , wealth management , supply chain finance , real estate finance and infra finance. Organisations companies include L& T finance (erstwhile called as Family Credit), L&T Capital markets, L&T Investment management, L&T Housing Finance, L&T Infrastructure Finance company and L&T Infra Debt fund ,L&T Financial consultants and L&T FinCorp.
SUPPLY CHAIN FINANCE: OVERVIEW AND WAY FORWARDWhat is Supply Chain Finance (SCF)? The supply chain ecosystem is a complex one – especially for multinational companies that work with suppliers all over the world. The health of a global supply chain isn’t just measured by revenue and profit. A more relevant indicator is how efficiently capital flows between buyers and suppliers. Slow moving capital, much like slow moving inventory, creates unnecessary costs and inefficiencies in a supply chain.It is defined as a way to increase working capital .SCF allows businesses to increase supplier payment terms and while giving them the option get paid early.Supply Chain Finance is defined as “the use of financial instruments, practices and technologies to optimize the management of the working capital and liquidity tied up in supply chain processes for collaborating business partners.
SCF is largely ‘event-driven’. Each intervention (finance, risk mitigation or payment) in the financial supply chain is driven by an event in the physical supply chain. The development of advanced technologies to track and control events in the physical supply chain creates opportunities to automate the initiation of SCF interventions.
“Supply chain finance (SCF) refers to the set of financial solutions available to buyers for financing specific goods and products as they move from origin to destination along the supply chain. Buyers, suppliers, and financial institutions, all stand to benefit from SCF programs that can improve financing terms that they would otherwise not have access to. Supply chain finance has become popular topic in treasury. Supply Chain Finance Programmes have gained heightened attention in business environment as the working capital and risk management have become important to the firms.
SCF industry is undergoing a rapid growth with the increasing demand and interest but the problem lies in lack of awareness for corporate practioners, many of them are not able to keep up with the evolution occurring in the space. Supply Chain finance is implemented as it helps to increase supplier liquidity needs, improves supplier relationship, stabilize the supply chain improvement, optimize the working capital, reduce cost and helps to create cash surplus and thus results in creation of additional revenue.SUPPLY CHAIN FINANCE PROCESS Steps involved:1. Buyer issues purchase order2. Supplier delivers good3. Supplier invoices buyer4. Buyer approves invoice for payment and send confirmation to financing institution5. Supplier offered early payment discount6.
Supplier accepts early payment7. Banks funds early payment to supplier 8. Buyer makes payment on original due date or extends the payment termsInterview was conducted with one of the dealers (Nexus Computers) of Ingram and feedback was taken from them regarding Supply Chain Finance service provided by LTFS.M/s. Nexus Computers Private Limited was established in August 1991 with the business objective of providing IT consulting, innovative and responsive IT Support services.
The company is well managed by 2 directors it’s directors namely Mr. Girish Chitnis and Mr. Vaidehi Chitnis. Nexus supply all leading brands of computers Servers, Networking Solutions, Security solution. Storage solution Including MNC, and domestic. Besides entire range of printers, and other accessories. In fact they are Authorized Business Partners of the leading global players. Company registered Reseller for HP, Business Partner for LENOVO, IBM, ACER, HCL, EPSON, MICROSOFT CISCO, APC, ETON, RADWARE, and OEM System Builder for INTEL.
Strategic location also enables us to maintenance of computers on Unix, Linux, LAN Network, Novell Network, Windows NT platforms. Besides Mumbai, Nexus has a Multi Location advantage. Company having a large Number of Clients such as RBI, UTV News, Laxmi Organic, State Bank Of India, Asia Star Company, NABARD, Central Railway.Being the dealer they were benefitted by this SCF program as this helped them in and provided the working capital for purchase of inventory. According to them the programme provided them with lower cost of funds than other working capital products and increased the financial discipline.EVOLUTION OF SUPPLY CHAIN FINANCE In the early years of SCF, developments financial institutions used to offer what they call as “traditional supply chain finance” which was considered as an extension of banking services. These programs visibility increased in early 2000s but at that time it was used primarily by the large companies and the top suppliers.
With the years leading to 2008 financial crisis, with the technological advancements and the continued increase in the globalization of economy, the relevance of SCF has increased many folds. During the crisis time, many banks and the several fintech firms were offering supply chain finance programs. Firms also started placing emphasis on working capital optimization and risk management because during the time of crisis these were the only reason for the downfall of the firms.
Recently supply chain finance has grown in its popularity over the past decade. The entrance of Software-as-Service (SaaS) technology is the recent development in the SCF landscape. There is transition into services that offer online marketplaces where buyers, suppliers and banks can conduct the business. These networks provide east connectivity options, cheaper onboarding and implementation costs, efficient interaction and communication across the supply chain. As the market is experiencing increasing interest in SCF solutions, SCF industry is undergoing rapid evolution in the form of shift from bank platforms to fintech platforms.
The popularity of fintech firms is disrupting the SCF industry. In recent years , it has been various fintech firms that have been responsible for large portion of innovation and development that has occurred and that has allowed SME and mid-market firms to increasingly participate in the SCF programs.By addressing the operational and technology challenges that prevented banks from growing the business, these fintechs are attracting a lot of interest from private-equity and venture-capital investors. As one fintech executive put it, “There are lots of opportunities for nonbank players to innovate and provide solutions that are needed in the market, but that banks are not willing to provide. A noninvestment grade offering is just one of them.”As the world’s economy has involved, different market segments have been affected in their own unique ways Sector Analysis of Supply Chain FinanceMost of the SCF programs are in automotive, manufacturing and retail sectors. According to the McKinsey interviews conducted with suppliers, buyers and industry experts globally, there are significant opportunities in technology and capital goods.
Revenues generated from current program are focused on investment grade (IG) space, but McKinsey suggests that non-investment grade (NIG) market is set for rapid growth. Supply Chain finance in construction.During 2013, SCF was new in construction.
Lloyds TSB, Santander and RBS are all active in this area. Other major sectors were following it like the automotive sector. Although the risk of the fact that end client will not be paying was borne by bank, but they used to mostly lend to AAA rated organizations so they are able to offer suppliers a lower interest rate than if the suppliers were borrowing directly.Logistics service providers are shaping the future for Supply Chain Finance.There have been tremendous changes in logistics industry. There is a new concept called Logistics service provider (LSP). SCF is the new logistics future. With a potential market of accounts receivable in the major European countries closed to the 2 trillion euro mark in 2016, it could not be any different.
However, accounts receivable (or payable) is not the only source of working capital gains: inventory plays a big role too, and here is why LSPs are in the perfect position to exploit the existing SCF market. This was the main reason that in 2016,SCF community has launched a 2 years pan-European project aiming for development of SCF schemes for LSPs.LSPs have provided inventory financing as the most common SCF solution. Even though inventories are being used as collateral for loans, LSPs are exploiting their visibility of product and information flows to give a new meaning to the concept.
These LSPs buy inventories from suppliers. LSP buys inventories from suppliers and keep them in warehouse (in their balance sheet) and when time comes sells them to buyer at high price. They enforce various buy back clauses, price conditions and other contractual requirements that minimise the risk of obsolescence and unsold inventories.In the near future, block chain is the incumbent technology with highest impact on role of LSP as providers of SCF solutions.Looking a bit further, the recent rise of circular economy business models will very likely play a huge role in the future of LSPs and SCF. Those new concepts of ownership, collaboration and urban mining will greatly impact the financing models underlying supply chains. The smartest LSPs will soon grasp the relevance of those models, as well as the key role they can play through their understanding and visibility of material, component and product flows. A role that goes beyond operations, directly into finance, from providing the right information at the right time, to offering new SCF schemes leveraging knowledge on physical flows.
https://www.thepaypers.com/expert-opinion/how-logistics-service-providers-are-shaping-the-future-of-supply-chain-finance/770176PESTEL ANALYSIS FOR SUPPLY CHAIN FINANCE INDUSTRY POLITICAL? Worldwide supply chains today, need to cross border and manage diverse nations with various political and social foundations. There are legitimate and social contrasts – both between and inside areas – that influence the approach taken towards financial supply chain management by financial establishment? Rise in terrorism, governments everywhere throughout the world are impeding the free stream of merchandise shipments by securing the passage of materials crosswise, over outskirts to shield their countries from external dangers which affects the movement of goods from suppliers to buyers. Such conditions challenge supply chain managers to adjust the relations with suppliers with transportation difficulties and amend inventory management strategies. Moreover many companies even reduce the number of their suppliers. Security considerations are likely to push more companies to abandon public exchanges in favor of private auctions (where only known and pre-screened suppliers are allowed to participate) ( Eg . spread of ISIS in Middle East made the safe passages of goods across borders increasingly difficult)? Inter-company transactions across borders are growing rapidly and are becoming much more complex.
Compliance with the differing requirements of multiple overlapping tax jurisdictions is a complicated and time-consuming task. At the same time, tax authorities from each country are imposing stricter penalties, new documentation requirements, increased information exchange and increased audit/inspection activity.ECONOMICAL? The cross-fringe exchanges are in this way complex in nature with various difficulties, for example, numerous currencies, diverse dialects and different lawful purviews? One of the key factor in implementation of supply chain finance is credit of the core enterprises committed allocate to upstream and downstream enterprises. When the core enterprise’s with a strong and comprehensive strength, Banks will grand more credit to them, and the line of credit can be allocated to the financing enterprises will increase as well, meanwhile, the strength of the core enterprise risk prevention ability is one of the factors of if it is willing to participate in of supply chain finance business? The scarcity and cost of capital Credit crunch created an incentive to explore SCF programs as the spread between investment-grade and noninvestment-grade rates widened. One of the main advantages of SCF programs is that they enable noninvestment grade suppliers to benefit from investment-grade financing rates.Technological? Digital technologies such as the Internet, Internet of Things (IoT), blockchain, cloud computing and big data are enabling supply chain integration and innovation which then support business model innovations. New business models allow companies to improve transparency and control of all three flows ie. Financial flow, information flow and flow of goods.
With the digital linkages of multiple processes across multiple organizations, the information asymmetry is greatly reduced. Financial Service Providers (FSPs) will be able to provide the needed credit and services to SMEs by collaborating with core enterprises in the supply chain. Big data analysis and close loop control of the three flows help the FSPs to evaluate and control risk at lower cost. This makes supply chain financing much more popular than before.? The automation of the full procure-to-pay (or account-payables) and order-to-cash (or account-receivables) cycles has enabled event-trigger financing services. For instance, a preshipment financing discussion can be triggered by an order confirmation.
The availability of procure-to-pay automation on independent third-party platforms allows buyers and suppliers to insert financial services and allows easy access to multiple liquidity providers, including small banks. ? There are emerging fintech players in Supply chain finance a market with a potential of over $2 trillion in financeable highly secure payables. Companies like Taulia, Ariba and C2FO have emerged as a result and facilitating transactions between buyers and their suppliers. These companies have offered wide array of automated products like electronic invoicing, supplier invoicing and supplier self-services which help both the buyer and the supplier to improve their working capital, improve their yields and lower the operating costs. They have delivered fully automated, integrated and scalable programs and even have easy on boarding process.? Credit rating is one of the key factor that helps financial providers in risk assessment. Credit rating depends on various factors. One of them being reliability of supplier and also reliability of buyer in paying on time.
However in case of risk assessment, proven transaction history is preferred by the lender. Earlier financial providers did not have the good way for risk assessment. Now the problem is solved by Big Data. Seaburt TFX created a program that offers suppliers financing based on their performance data on cloud platform from GT nexus. Cloud based network has a detailed transaction history. Financial provider will set terms based on historical performance of buyer and supplier. Metrics like on-time payments, order performance, late shipments, cancelled orders and chargebacks determine risk.
The new business model helped financial institutions? Absence of mechanization in the payment processes alongside poor deceivability makes it troublesome for SCF suppliers to actualize working capital and third party financing programs. Delays in invoice reconciliation are a specific reason for extra working capital that delay receipt of payment and increment DSO of receivables? The adoption of the concept of e-invoicing allows for electronic data exchange hence improving on performance of supply chain financing as transaction documents are processed in real time despite significant differences in terms of distance.? According to supply chain experts the 3 primary pain areas are visibility, process optimization and demand management. The solution to these pain areas is BLOCKCHAIN as it provides system of trusted records that address these.
This technology will offer potential to both corporates and finance providers in terms of increased control, speed and reliability of their supply chain and at a fraction of the cost of their current infrastructure. Payments made by this platform will be monitored by both the parties meaning that suppliers are no longer at a disadvantaged position in the buying process while they wait for processing. Blockchain will speed up the process, giving the two companies more control, and in the long-term would ultimately create more robust supply chains. The time required from initiation to payment can be dramatically reduced. Other benefits for importers and exporters include reduced bank fees (due to less manual activity on the part of the banks), reduced time for loan approval, and reduced risk of fraud. This way of financing a supply chain is radically cheaper and more efficient than the current way of doing business. Social? Willingness to issue payment terms extension as well reduce costs among trading partners seriously affects the performance of any adopted supply chain financing mechanisms adopted by firms.
? Frequent changing of firm suppliers is likely to disrupt optimal SCF performance as new suppliers may be receptive to adopting such a financing system.? Trade between core enterprise and upstream and downstream small and medium-sized enterprises involved in logistics, information flow, cash flow, etc, If the coordination level between core enterprise and upstream and downstream enterprises is high, can promote the core enterprise and upstream and downstream trade stability of small and medium-sized enterprises, which could guarantee the stability of trade between core enterprises and small and middle size enterprise and affect the operation of supply chain financing.? Lack of awareness by the suppliers : If the buyer fails to communicate with its suppliers how their relationship will be affected by SCF, suppliers may hesitate to use this programme. Renegotiation with respect to payment terms is sensitive area for suppliers therefore if they are not enlightened about the benefit of SCF program then it might be challenging ENVIRONMENTAL? The globalization of the economy has lengthened supply chains, increasing the number of suppliers and boosting the number of transactions.
Moreover, supply chains have become more complex with the development of direct sourcing which has further created a need for integrated solutions.? Geographical expanse, cultural differences and government laws and regulations likewise force genuine difficulties for executing SCF activities. On boarding & monitoring of dealers/suppliers due to bigger geographies becomes difficult.? Globalization of trade and finance also requires more flexible, lower cost financial products with controllable risk. Many governments provide insurance and credit supports to companies who are exporting products.
These government supports also encourages FSP to design SCF services for international trades.? We used to speak about confirming in general terms but in reality there are domestic suppliers (suppliers located in the same country of the buyer) and foreign suppliers (globalization has determined that buyers work with suppliers in other areas of the world, and this is happening more and more). The domestic part is relatively easy to manage, and it is thought to be at a stable level and account for at least 80% of the total business, maybe even a bit more. But the international part, which is not that easy to manage as there are other aspects to be considered than in the domestic business, is growing. For instance, aspects like KYC, tax and legal regulations, language, may affect or even hamper the possibility to finance foreign suppliers.All these difficulties mean that financial institutions prefer allocating more effort to domestic suppliers rather than to the cross-border ones.Supplier financing is a complicated issue with respect to global transactions as factories are located around the world in the process .
It involves long track of records of reliability, size, location and credit history that prevents them from accessing capital. It’s vital for their operations that supplier should be having capital. It’s also vital for larger strategic supply chain goals like the assurance of supply, ethical production and sustainability.Legal? There is lack of legal and regulatory consistency across different regions. This makes the process of implementing SCF across different regions a complicate endeavor. Apart from inconsistent regulation there is an issue of lack of regulation in some areas as well. The absence of any real credit profiles and the rating structure created a problem.
There are various articles like Article 9 and Article 3( In U.S. , the Uniform Commercial Code(UCC) governs the private transactions including the receivables in different countries different regulations ? Jurisdiction challenges come in the form of varying requirements for product approval, regulatory reporting, perfection of legal ownership of receivables, stamping of documents and payment of associated taxes, how to register interests in underlying assets, and country specific AML (anti money laundering) and CTF (counterterrorism financing) requirements. These AML and CTF requirements may require additional fields for assessment, additional names (country specific lists) and the requirement for full KYC on suppliers. If you want regional coverage, you can be assured your product offering will not be homogenous, and in some locations straight through processing (STP) will not be possible.? new guidelines and directions are controlling exchange with regularly cumbersome documentation need to go with the shipmentsINDUSTRY ANALYSISGLOBAL OUTLOOK OF SUPPLY CHAIN FINANCEAs the supply chains are lengthening with the result of globalization and the offshore production, companies experienced a reduction in capital availability.
Pressure faced by companies to improve cash flow has resulted in increased pressure on their overseas suppliers. Specifically, suppliers receive pressure in the form of extended payment terms or increased working capital imposed on them by large buyers. Supply Chain Finance comes as a solution to such problem.
Supply chain finance is an existing concept and it is the payable finance which there since long time. The professionalism of SCF offering began during 1980s where banks mostly Santander and BBVA offered payable finance solutions to the corporate clients. It was basically the global expansion of the Spanish banking sector which led to global implementation of the payable finance solution. But the uptake did not reach expectations because of the technical limitations. It was the financial crisis of 2008 that led to the new chapter of SCF globally. The UK was one of the first countries to roll out a supply chain finance initiative to help small, local businesses get paid earlier at attractive terms. UK government realized that it was a major step in boosting the economic growth and protecting the jobs,The total worldwide market for receivables management is US$1.
3 trillion. Payables discounting and asset-based lending add an additional US$100 billion and $340 billion, respectively. The market for supply chain finance has grown by 36% in volume in 2016 compared to 2015 reaching US$447.8bn. The amount of funds in use as at the end of 2016 is estimated at US$167.
8bn, an increase of 43%. The current, global market size for Supply Chain Finance is estimated at US$275 billion of annual traded volume, which translates in approximately $46 billion in outstanding with an average of 60 days payment terms. It is still relatively small compared to the market size of other invoice finance solutions such as factoring, which remains the largest trade finance segment and is primarily domestic in focus.
The potential market for Supply Chain Finance for the OECD (Organization for Economic Co-operation and Development) countries is significant and is estimated at $1.3 trillion in annual traded volume. US market size for Supply Chain Finance is estimated to be $600 billion in traded volume. Supply Chain programs are run both domestically and cross-border and in multiple currencies.NORTH AMERICA Supply chain finance market is mature in North America. North America’s economy is well-developed and has a legal framework, so the SCF program can be established without any legal complication. SCF is majorly concentrated on development and innovation of existing solutions.
Many US based buyers are looking to develop robust cross-border SCF programs. Currently many of world’s largest corporations are headquarter in United States, but their suppliers are located in other regions. So as the market is evolving, their ability to connect to large number of suppliers pose a greater opportunity for growth.LATIN AMERICA SCF growth was hindered in Latin America because of lack of robust credit structure. Usually in developed countries, entity who wanted to acquire loans were assessed with the credit profile and those who were financially sound had and had less risk received better credit rating.
However in Latin America there was hardly any difference between credit profiles for different companies. According to this SCF landscape in Latin America, only large, global banks and individual factoring agencies are more successful. As the region is developing, new SCF providers are there in market. South America, being an untapped region is still viewed by companies as the technological and economic progression enables them to do so. EUROPE SCF has been playing a larger role for a number of years. Europe is mature region with respect to education and development for SCF. As new SCF techniques are developed and introduced in the market, firms have shown willingness to implement them.
Hybrid approaches such as funding from both banks and buyers, as well as self-funded approaches such as dynamic discounting are increasing popularity. Firms are looking for ways to innovate SCF programs. Morover, increased awareness about the plight of SME suppliers to obtain capital has helped drive a number of buyers to implement SCF programs that allow “long tail” of supply chain to participate rather than only the most creditworthy suppliers.
ASIA Most of the largest suppliers are located in Asia. At the same time, vast number of small suppliers populate the region so much so that almost every buyer has supplier in Asia. There have been diverse set of rules and regulations in Asia that have made consistency with regards to SCF very difficult. But developments in the international market have helped to overcome those barriers.
According to the EuroFinance survey sponsored by the HSBC found that even though 42% of corporate participants had SCF programs in Asia, none of them have been able to implement their program in every region of Asia they wanted to. It is estimated that growth in supply chain will be highest in Asia especially as the technology, infrastructure and regulatory framework of the region is improving and SCF awareness is rising. Overall, the global growth of the supply chain finance industry, in US dollars, was expected to increase by nearly 30% during the 2016, up to total of $46.5 billion dollars( in terms of funds used in available SCF programs). According to McKinsey, revenue within SCF industry has grown by 20% year over year since 2010 and is expected to grow at a rate of 10-15% for next 3-5 years.
Research conducted by Demica shows that supply chain financing at major international banks is growing by a rate of 30 to 40 % a year, and much of the expected future growth will be driven by local supply chains. INDIAN OUTLOOK OF SUPPLY CHAIN FINANCEThe policy making in India is subject to multiple demands but they lack the focus on result. The implementation is hampered because of the lack of inertia and expertise.
There are continued policy failures with respect to higher education and digital technology. In order to achieve rapid inclusive growth and higher employment level, India needs to create more firms. Finance is the major source of constraints for these firms to grow in India.
These small firms are the part of supply chain of larger firms, but these small firms are squeezed by the larger firms customers because of the delayed payment. Demonetizations further increased the problem of these small firms. Hence the matter required urgent attention. Moreover, the introduction of the Goods and Services Tax (GST), liberalizing foreign direct investment (FDI) rules, and increased government spending has helped spur growth in the sector.India’s aspiration to become a global manufacturing powerhouse and the government spotlight on ‘Make in India’ also compelled nationwide supply chain reform which has prompted several federal and state-based schemes and investment incentives.
India’ s market size is INR 650 billion($ 10 billion).The key Players are SBI, HDFC Bank, Standard Chartered Bank, Axis Bank, IndusInd, Aditya Birla Finance Tata Capital etc. In India, government tried to legislate the problem of delayed payments especially in MSME sector, they set up a new electronic exchange Trade Receivables Discounting System (TReDS). The government has mooted making its use mandatory for corporates and public sector undertakings, to get it started. On the other hand, only smaller firms will be able to participate as sellers. Banks and other financial sector companies can act as financiers.
RBI gave approval to three entities to create platforms under the TReDS rubric, and only one of them (Receivables Exchange of India Limited) has formally launched, but there is no evidence that its use has taken off. During the same time ,”fintech firms” in developed countries were finding ways to harness the IT to intermediate between the small suppliers and the larger business customers but the information technology that they use is without the mandated structure of Indian effort . This has posed the question on India’s current approach.Now the future of supply chain is digital with fully integrated physical and financial supply chain delivering shortened procure to pay cycle, reduced cost of goods sold and freeing working capital. Access rights and security will be provided by distributor ledger, smart contracts will trigger payments and finance when pre-defined conditions are met.Although the progress toward this goal is slow but there is evidence that this will be the future. There are partnerships between physical supply chain providers and the banks as can be seen from the partnership between HSBC and GT nexus.
Even many banks are participating in multibank SCF platforms. Many banks are providing digitized supply chain finance product with state of art technology like Bank of Baroda which have launched digital supply chain finance solution aiming to accelerate working capital loan requirements for SME and large corporate clients. This product provides range of supply chain finance products which cover pre and post-shipments products like dealer and vendor finance.Then there is use of blockchain also in supply chain. Distributed ledger technology (DLT) also referred to as blockchain has various characteristics. YES Bank is one of India’s prominent financial institutions in the private sector, the bank has recently run a pilot on DLT based vendor financing with one of its corporate clients, Bajaj Electricals. The bank has partnered with FinTech startup Cateina Technologies to build a smart contract application on the Hyperledger blockchain.
The bank has also partnered with IBM Bluemix to enable digital experience by means of virtual assistants for all the partners who access the DLT platformThe purchase order created by Bajaj is paper-based, upon which the vendor creates a paper-based invoice which is manually logged in Bajaj’s ERP. At this point, YES Bank connects to Bajaj’s ERP via API and stores the invoice data on Hyperledger’s blockchain. This invoice data is worked upon by various departments within YES bank that perform checks and verifies terms on the digital invoice through smart contracts that embed business logic (here, terms of payment, interest rates, etc). Like in the previous case, the funds are disbursed to the vendor upon verification. YES Bank has created a web-based platform where the parties to the transaction, i.
e., Bajaj, the vendor and YES Banks’ departments can track the invoice status in real time.Mahindra and IBM are working to create a common platform for Mahindra Finance’s supplier to manufacturer transactions, allowing all parties to view transactions in real time, driving trust and transparency through the supply chain.
The project, a first of its kind in India outside of the traditional banking domain, aims to step up transparency and security between supplier-to-manufacturer trade through a permissioned distributed ledger.The Corporate and Institutional departments of banks have also started including Supply Chain financing as part of their entry strategy like Corporate and Institutional department of Standard Chartered have included Supplier Finance as a bilateral financing programme offering packaged finance facilities to key suppliers of the customer’s company. New age NBFC’s dominating the SCF market like Capital Float .Morover there there is a fintech company INCred Finance which has entered into a strategic alliance with the X10 Financial Services Limited, a Gurugram based NBFC which offers working capital financing to small and medium enterprises (SMEs) across various supply chains.
They have joined hands to provide technology led working capital financing to SME’s. Then TATA Capital and Capital Float have also joined hands to fund small business. Tata Capital will be co-lending on Capital Float’s digital lending platform and through this relationship; both the companies have collaborated to offer a unique “Pay Later” product to SMEs.
OBJECTIVE OF THE PROJECT? To understand various Supply Chain finance concepts.? Study about the Supply Chain Finance Industry? Insights about global and Indian outlook of Supply Chain Finance.? To find out the drivers in the success of Supply Chain Finance? Comparative analysis of SCF in LTFS, Banks and Fintechs.? Proactively assess the market situation and recommend solution to LTFS that will optimize the value for the company.? Study about TReDS platform.RESEARCH METHODOLOGYResearch methodology is defined as a science of studying how research is done wherein in we study the various steps that are generally adopted by researcher in studying the research problem along with the logic behind them.The approach used in this work combines three different stages and methodologies which involved Preliminary methodology which was based on extensive review of diverse relevant literature; Adjusted methodology as a result of academics practioners and expert perspectives.
Third is proposed methodology for evaluating companies’s degree of adherence to SCF model.Descriptive research was conducted to find out the current state of affairs in Supply Chain Finance industry. It also aims at finding what practices of Supply Chain finance are conducted globally and in Indian market. Analytical research was conducted in which I used the facts on information already available on online resources and analyze them to make critical evaluation of the the current scenario of LTFS Supply Chain Finance department.Secondary data ie. the data that is either published or unpublished data is being used in this study. Various publications of Indian, foreign governments and International bodies was being used. Apart from that the reports and publications prepared by various research scholars ,universities and economists was being used.
Adding to this, information regarding Supply Chain Finance practices and process in LTFS was collected by interaction with the Wholesale Supply Chain Finance team in LTFS which helped in conducting comparative analysis of SCF in LTFS , Banks and fintechs. Further a meeting was conducted with one of client in Dealer Finance to get an insight from dealer perspective how SCF is helping them and what benefits and improvements they suggest which will help in choosing our future strategies with respect to Supply Chain Finance.Owing to the nature of SCF and financial institutions involved in services, study has majorly Indian perspective.
SUPPLY CHAIN FINANCE IN LTFS L&T financial services focus on Dealer finance, vendor finance and E-commerce seller finance. Vendor finance involves business especially dealing with large manufacturers and Original equipment manufacturers (OEMs). Vendor Finance is a bill discounting facility that gives suppliers working capital finance. Borrower will not have to spend time looking to meet their working capital requirements. With flexible tenor we can also link our business to the normal credit period provided by the Anchor. Fees and charges are as per corporate tie-up scheme. Documents required under vendor finance involve audited financials, KYC documents (ID proof, Age proof, Address proof), bank Statements, business projection.
Loan interest rates usually range from 10.9-13%. Any supplier to a large manufacturer having a credit rating of at least “A” and with satisfactory financial numbers can avail of this loan. Vendor financing is short term financing with a revolving tenor of 45-120 days. It Improves supplier’s access to working capital, Anchor’s working capital availability through elongation of payment period, gives Opportunity to extend and rationalize trade terms, improves buyer and supplier relationship with uninterrupted supply of materials and is simple and flexible. The loan can be repaid using the RTGS or NEFT facility.
Dealer finance deals with the needs of dealers, distributors and stockists. Inventory finance limit is based on a rotating tenor. The finance is to be used exclusively for purchases of goods manufactured by the company of which the borrower is a dealer or distributor. It helps them gain easy access to finance that can help them meet their working capital requirements. This puts purchasing power back in the hands of the dealer or distributor and helps manufacturer build robust distribution networks. The dealers/distributors and the manufacturer should have at least 1-2 years of relationship for availing of the trade finance.
Documentation requirement is same as vendor finance. The funds made available under dealer finance scheme cannot be withdrawn in cash. This is a trade finance meant to be used for purchase of goods from a company for which the dealer / distributor had sought the loan.
The funds cannot be used for any other purpose. Payments from the finance so available should be made only to the company for which it is the dealer / distributor. The loan can be repaid using the RTGS or NEFT facility. It is a short term revolving finance, involve simple documentation process, and facilitate instant and direct payment with faster sanction and loan disbursement. E-commerce seller finance Company had collaboration with top online market places in India that helped them to understand and design their products for providing seller finance in E-Commerce sector.
This product helps to address the working capital purchasing requirements of a merchant or manufacturer selling products through online market place and increase purchasing power. On the basis of a rotating tenor, the working capital limit for online market place is met. Merchants can use the funds exclusively for purchase or manufacture of goods. This facility offers you quick, easy access to trade or inventory finance, thereby improving your purchasing power. It helps E-Commerce portals to source a diverse range of products for its end customers. The suppliers to the E-Commerce portals should have a sales history of at least 6 months to avail purchase finance loans.Details of Vendors in Vendor Finance 1.
ECC B&F (Buildings and Factories)2. L&T EBG3. L&T Heavy Engineering Division4.
L&T Heavy Civil5. L&T MMH (Materal Handling)6. L&T Power7. L&T PT&D (Power transmission and distribution)8. L&T Rubber Machinery9. L&T STEC JV (Joint Venture)10.
L&T Valves11. L&T WET (Water Effluent Treatment)12. L&T Hydrocarbon13. L&T TIIC (Transport and Infrastructure)14. Syska LED (Non L&T)15. IL&FS (Non L&T) 16. ACC ( Non L&TDetails of Anchors in Dealer Finance 1. Maruti (Non L&T)2.
Hero (Non L&T) 3. Ingram (Non L&T)4. SSK (Non L&T)5. Tata Motors Ltd (Non L&T)6.
JSW Steel (Non L&T)7. Valfin Program8. Metfin Program9. New Tool Fin 10. PowefinTransaction process for Vendor Finance Transaction process for Dealer Finance SWOT ANALYSIS OF SUPPLY CHAIN FINANCE IN LTFS Comparative Analysis of Supply Chain Finance in LTFSLargest financial institutions having large capital reserves with deep client relationships have a competitive advantage. Most of them are offering SCF programs from decade. They are able to cross sell services to their existing clients.
Moreover the companies who are need of direct relationships may choose to rely on primary banks to deliver their scope of SCF rather than implementing the solution of third party. However domestic and regional banks with fewer assets find it difficult to keep pace with the fintech firms. So for these firms it is better to partner with the fintech firms or larger banks and provide third party funding.
Fintech firms are effective with respect to offering flexibility to clients with regard to supplier on boarding. Bank led platforms are not effective for buyers entire supply chain, but fintech firms allow for the long tail of suppliers especially SME who are not provided access to bank led platforms. SaaS based networks offered by today’s fintech provide quick on boarding process that allow buyer’s all suppliers uploaded to system in just weeks.
Fintechs have also included e-invoicing, e-payment, document management and other components of procurement-to-pay cycle. All these functionalities are coupled with interactive user interface and system can be accessed with online portal . This enable buyers and suppliers to virtually complete every step of their transactions centrally leading to reduced costs an complexity. Many banks and fintech firms are cooperating with respect to the SCF since both the parties are struggling to gain market share.
According to the Mckinsey survey , banks held 85% approximately share in global SCF market in 2015 in comparison to 15% of fintech firms. In 2005 the banks held approximately 95% of market and fintech held only 5% . The current economic climate is forcing many companies to better manage liquidity and strengthen their balance sheet. Supply chain finance (often referred to as SCF/Supplier Finance/Reverse factoring) can be an attractive way for companies to improve their working capital position. Comparative analysis if LTFS with Banks and Fintech companies with respect to supply chain finance is as follows: Particulars L&T Finance Bank Fintech CompaniesProducts Dealer finance, vendor finance( pre-shipment finance) and E-commerce seller finance( earlier) Dealer financing, vendor financing, rent receivables financing, purchase order financing and factoring of receivables. Prime revenue:SCiMap,SCIEnable, SCiSupplier, SCiCustomerDemica:Trade Receivables securitisation, Receivable portfolio purchase, factoring and invoice finance.Rate of Interest Dealer finance: 11.
75%-13%Vendor finance: 10.9%-13 % 12-14% Varies from case to caseState-of-Art technology platforms No All YesMulti-currency capacity No Yes YesCompetitive , flexible pricing with no additional fees No Yes YesStraightforward enrolment process of suppliers No No YesGeography Domestic transactions Domestic +International transactions Domestic+International+SMEFlexibility wrt supplier onboarding No Less in comparison to fintech YesEffective for entire supply chain No No allow for the long tail of suppliers especially SMEProcess Manual Automatic AutomaticDocumentation Easy Stringent Less stringentTechnological advancement Lacks technology platform and ERP systems They have technology platforms Have technology platforms and ERP systemsPart of TReDS programme NO Yes NoAnalysis of LTFS BOOK SIZE ? Company has partnered with TATA Motors in the year 2017-18.? Businesses with Syska and Ingram have improved.
? New initiatives like E-commerce seller finance were closed in the year 2017-18. FACTORS LEADING TO SUCCESS OF SUPPLY CHAIN FINANCEThe success in SCF has traditionally depended on four factors:• Easy-to-use and resilient digital platform that can be integrated into buyers’ enterprise resource planning systems and sellers’ accounts receivables systems.• Geographic reach that provides decent coverage to programs, most of which are regional.• Adequate credit capacity or distribution capability to support program growth.• Operational capability to ramp up programs and ensure they are profitable. First three factors have been the major cause of concern for banks/financial institution. Majorly operational capability to minimize the complexity and for rapid on boarding of suppliers has been on the priority list. According to the research conducted by the McKinsey, anchor buyers (those who set up SCF programs) consistently rank supplier onboarding as the single most important factor for successful program.
Similarly, 80% of supplier’s rate onboarding support through documentation, training and tools as key to determining their participation in a program. Buyers have been complaining that because of the challenges like complex documentation or the lack of awareness of the suppliers, SCF programs are not being utilised properly. This is the reason because of which only 1/10 of the potential ie. $2 billion of the potential $20 billion in SCF revenues—is captured globally. This is the major cause of concern which is being utilised by the fintechs who have been focusing on developing their operational capability and technology to strengthen themselves by introducing online tools and training to help suppliers on board. In addition to that they are also changing the way buyers and suppliers are thinking about SCF by introducing new approaches like programs for small suppliers and auction based solutions.Digital supply chain finance is a key that connects SCF space on one hand and capital markets on the other hand.
Digital supply chain is required to meet following requirements:a. fully digital underwriting engineb. ease of on-boarding c. Underwriting must be inclusive.Other factors leading to the success of supply chain finance are as follows:? Knowledge and data among SCF managers about SCF programs.
? Training of SCF tools and techniques.? Innovation in Supply Chain Finance (shift from manual paper based to technology based)? New analytics driven solution? Concentration on varied industries ? Common platforms for all the financiers.? Adequate credit capacity or distribution capability to support program growth.? Simplicity of the platforms.? Nature of Responsiveness of traders in supply chain financing ? Presence of strategic planning that increases the integration between buyers and sellers within organization enhance performance? SCF solution deployed in multiple languages and currencies, with well-established supplier on boarding capabilities and a support team that can help your procurement team different countries.? Cross functional approach: Involvement of procurement and account function with Treasury and Finance.? Right technology platform and finance partner: SCF has resulted in multiple technology approaches having different level of flexibility and integration with ERP system.
Right selection is required for long term success. ? Minimise invoice approval times, maximise use of e-invoicing, self-billing and cooperation with suppliers.Competency Framework for entire Supply Chain Finance program Operational model: Clear operational model is required within the financing institution which includes well defined place in organisational structure, streamlined processes and clear responsibilities. Thorough understanding of the operating and legal environment that defines product and service offering for a specific market is required.
Product and servicesDesigning of product strategy and choosing the SCF products requires the understanding of market size and competitive landscape in order to innovate and find the appropriate offering which will help in gaining the market share, as well as the legal and financial infrastructure landscape(Like moveable collateral registries) that will help to identify the most demanded and scalable SCF products. Detailed product design with accompanying credit policies and product implementation plan isCredit Risk ManagementDesigning of appropriate credit policies detailing the anchor client classification criteria and corresponding buyers and suppliers is required to safely scale up the SCF program. There is need for industry benchmarks is required to improve the risk design and pricing profiles.
In more advanced cases, application and behavioural scoring model can help to support credit differentiation process. A well-structured collections framework and an active client management approach at the SME and corporate level are key for minimising losses when late payment cases arise.Sales and Delivery ChannelFinancial institution must establish a cost-benefit analysis (peer group comparison of working capital efficiency) for every client chosen for SCF program. Proper on boarding mechanism for suppliers and distributors with detailed functionality of the programs and products, technology and benefits of participating in program should be created.
HR; Systems Proper incentive and reward system to align sales force and achieve the growth and scale of SCF program. Training of technical and operational skills is required for both the corporate and SME staff to sell and fully service clients in supply chain.Management dedicationCreating a supply chain finance program involves a complex set of processes and procedures, which requires a strong central coordination function with a dedicated supply chain finance team.
The team has to be responsible for gaining the buy-in from various stakeholders in the bank (for example, corporate/commercial, retail/small business, credit, compliance, IT, legal, and HR), which often entails clear profit sharing/shadowing arrangements, and a strong commitment from management to drive the program through inception to implementation.Trade Receivables Discounting system (TReDS)Micro, Small and Medium Enterprises (MSMEs) play an important role in economic fabric of country but they continue to face constraints with respect to obtaining finance. In order to address this issue guidelines were issued by Reserve Bank of India under Section 10(2) read with Section 18 of Payment ; Settlement Systems Act, 2007 (Act 51 of 2007).Scheme • The scheme for setting up and operating the institutional mechanism for facilitating the financing of trade receivables of MSMEs from corporate and other buyers, including Government Departments and Public Sector Undertakings (PSUs), through multiple financiers will be known as Trade Receivables Discounting System (TReDS).• The TReDS will facilitate the discounting of both invoices as well as bills of exchange. Further, as the underlying entities are the same (MSMEs and corporate and other buyers, including Government Departments and PSUs), the TReDS could deal with both receivables factoring as well as reverse factoring so that higher transaction volumes come into the system and facilitate better pricing• The transactions processed under TReDS will be “without recourse” to the MSMEs.Under the scheme two important definitions needs be understood • Financier- A bank or an NBFC factor participating in the TReDs and the one accepting the factoring unit for financing purpose.• Factoring unit: It refers to an invoice or a bill on the system.
Factoring Units may be created either by the MSME seller (in the case of factoring) or by corporate and other buyers, including Government Departments and PSUs, (in case of reverse factoring) as the case may be. Participants MSME sellers, corporates and other buyers, including Government departments and PSUs, and financiers (both banks and NBFC factors) are the direct participants in the TReDS. TReDS platform brings all the participants together for facilitating uploading, accepting, discounting, trading and settlement for the invoices / bills of MSMEs. The bankers of sellers and buyers may be provided access to the system, where necessary, for obtaining information on the portfolio of discounted invoices/bills of respective clients. TReDs may tie up with necessary technology providers, system integrators and entitites providing dematerialisation services for providing its services. Process flow and procedure ? The objective of the TReDS is to facilitate financing of invoices / bills of MSMEs drawn on corporate and other buyers, including the Government Departments and PSUs, by way of discounting by financiers. To enable this, the TReDS has to put in place suitable mechanism whereby the invoice / bill is converted into “factoring unit”.
? In the first phase, the TReDS would facilitate the discounting of these factoring units by the financiers resulting in flow of funds to the MSME with final payment of the factoring unit being made by the buyer to the financier on due date. In the second phase, the TReDS would enable further discounting / re-discounting of the discounted factoring units by the financiers, thus resulting in its assignment in favors of other financiers. ? The process flow of the TReDS has to enable at the minimum, the uploading of invoices/bills and creation of factoring units by the MSME sellers; its acceptance by the corporate and other buyers, including the Government Departments and PSUs, within a specified time limit; discounting, rating and re-discounting of factoring units; sending of notifications at each stage to the relevant parties to the transaction; reporting and MIS requirements; and finally, generation and submission of settlement of obligations. In case of reverse factoring, the buyer could also create factoring units based on the documents uploaded by the MSME seller. A brief illustrative outline of the minimum features required in the process flow is given in the Annex. ? The entity operating the TReDS will prepare actual business, technical and operational processes and procedures and will be part of the Procedural Guidelines for the system. ? Random audits will be undertaken to ensure that the factoring units uploaded on the exchange are authentic ; based on genuine underlying transactions involving the sale of goods or services.? Standardized mechanism / process for on-boarding of buyers and sellers on the TReDS will be put in place .
All the entities will be required to submit all KYC related documents to the TReDS, along with resolutions / documents specific to authorised personnel of the buyer, and the MSME seller for one time on-boarding process. Such authorised personnel would be provided with IDs / Passwords for TReDS authorisations (multi-level). Indemnity in favour of TReDS, may also be given if it is made part of the standardized on-boarding process. ? The KYC documentation and its process may be standardised and disclosed to all stakeholders by TReDS. Since confirmation of the banker of the MSME seller / buyer is required ,the KYC documentation may be synchronous with the documentation / verification done by the banks in adherence to the extant regulatory requirements.
? There would be a one-time agreement drawn up amongst the participants in the TReDS: (a)Master agreement between the financier and the TReDS, stating the terms and conditions of dealings between both the entitiesb) Master agreement between the buyers and the TReDS, stating the terms and conditions of dealings between both the entities. This agreement should clearly capture the following aspects: (i) The buyer’s (corporates and other buyers including government departments and PSUs as the case may be) obligation to pay on the due date once the factoring unit is accepted online. (ii) No recourse to disputes with respect to quality of goods or otherwise. (iii) No set offs to be allowed. c) Master agreement between the MSME sellers and the TReDS, stating the terms and conditions of dealings between both the entities. It should have a declaration / undertaking by the MSME seller that, in respect of goods and services underlying the factoring unit, no finance is extended by the working capital financing bank and such goods and services are not charged to the working capital financing bankers d) In case of financing on the basis of invoices, an assignment agreement would need to be executed between the MSME seller and the financier. Alternatively, this aspect may be incorporated in the agreement between the MSME seller and the financier, to the effect that any financing transaction on TReDS will tantamount to an assignment of receivables in favour of whoever is the financier.
e) The TReDS will be in custody of all the agreements. • Other procedural aspects of TReDS functioning and operations may be incorporated either in the Master Agreement, if so necessitated by the participants, or in the Procedural Guidelines where applicable. In all instances, such procedural aspects, even if incorporated in the Master Agreements, should be in adherence to regulatory norms issued from time to time. The Master Agreement may also clearly indicate that any legal proceedings to be initiated by one entity against another, if at all, will be outside the purview of TReDS. • TReDS will also review the need for CERSAI registration for the assignments as indicated above, and put in place a suitable mechanism for the same (preferably driven automatically through the TReDS), as soon as feasible after a factoring unit has been accepted for financing by a financier.In case of settlement process, mechanism is required that ensures timely settlement of funds between member financiers and MSME sellers and further settlement of the funds between member buyers and the respective financiers on factoring unit’s due date.
Payment obligation of all financiers on T+2 basis and send the file for settlement in any of the existing payment system as agreed by participants. TReDs will be required to put in place mechanism for bankers to report defaults in payment by buyers. Adequate arbitration and grievances redressal mechanism is also required to be put in place. All the clearing and settlement activities under TReDS will be governed by regulatory framework put in place by Reserve Bank of India under Payment and settlement Systems Act 2007 (PSS Act) .Eligibility criteria to operate TReDSEntities who want to set up and operate the TReDS should fulfill following criteriaa) FINANCIAL CRITERIA • TReDS is not allowed to assume any credit risk; its minimum equity capital shall be Rs. 25 crore.• Foreign shareholding will be as per the extant of foreign investment policy.• Entities which are other than promoters will not have shareholding in excess of 10% of equity capital of TReDS.
Hence overall financial strength of promoters/ entity who seeks to set up TReDS would be an important criteria of assessment.b) PROMOTER’S DUE DILIGENCE c) TECHNOLOGICAL CAPABILITY• Electronic platform for all the participants • Information about bills/invoices, discounting and quotes to be disseminated by TReDS in real time basis.• TReDS should have suitable Business continuity plan(BCP) including disaster recovery site.• An online surveillance capability monitoring positions, pricing and volumes in real time to check system manipulation.PROCESS UNDER TReDS Step 1 : Supplier delivers the goods/services (Outside TReDS)Step 2 : Buyer Logs in & upload the invoice Step3 : Validate invoice, convert to factoring unit & publish the acceptance .Step 4 :Buyer logs in & accept the invoice.
Step 5 : Publish the factoring unit for biddingStep 6: Financiers bid against the factorStep 7 : Accepts the bidsStep 8 :Exchange generates the settlement file to debit Financier and pay supplierStep 9 : Exchange debits the Financier’s bank account and credit the supplier’s bank account.Step 10 : On due date, final settlement is generated.Step 11: Exchange debits buyer’s bank account and credits financier’s bank accountDETAILED PROCESSCorporate and other buyers, including Government Departments and Public Sector Undertakings, send purchase order to MSME seller (outside the purview of the TReDS). b) MSME seller delivers the goods along with an invoice.
There may or may not be an accepted bill of exchange depending on the trade practice between the buyer and the seller (outside the purview of the TReDS). c) Thereafter, on the basis of either an invoice or a bill of exchange, the MSME seller creates a ‘factoring unit’ (which would be a standard nomenclature used in the TReDS for an invoice or a bill on the system) on TReDS. Subsequently, the buyer also logs on to TReDS and flags this factoring unit as ‘accepted’. In case of reverse factoring, this process of creation of factoring unit could be initiated by the buyer. d) Supporting documents evidencing movement of goods etc. may also be hosted by the MSME seller on the TReDS in accordance with the standard list or check-list of acceptable documents indicated in the TReDS. e) The TReDS will standardise the time window available for buyers to ‘accept’ the factoring units, which may vary based on the underlying document – an invoice or bill of exchange.
f) The TReDS may have either a single or two separate modules for transactions with invoices and transactions with Bills of Exchange, if so required. In either case, all transactions routed through TReDS will, in effect, deal with factoring units irrespective of whether they represent an invoice or a bill or exchange. g) Factoring units may be created in each module as required. Each such unit will have the same sanctity and enforceability as allowed for physical instruments under the “Factoring Regulation Act, 2011” or under the “Negotiable Instruments Act, 1881”.h) The standard format / features of the ‘factoring unit’ will be decided by the TReDS – it could be the entire bill/invoice amount or an amount after adjustment of tax / interest etc.
as per existing market practice and as adopted as part of the TReDS procedure. However, each factoring unit will represent a confirmed obligation of the corporate and other buyers, including Government Departments and PSUs, and will carry the following relevant details – details of the seller and the buyer, issue date (could be the date of acceptance), due date, tenor (due date – issue date), balance tenor (due date – current date), amount due, unique identification number generated by the TReDS, account details of seller for financier’s reference (for credit at the time of financing), account details of buyer for financier’s reference (for debit on the due date), the underlying commodity (or service if enabled).i) The TReDS should be able to facilitate filtering of factoring units (by financiers or respective sellers / buyers) on any of the above parameters. In view of the expected high volumes to be processed under TReDS, this would provide the necessary flexibility of operations to the stakeholders. j) The buyer’s bank and account details form an integral feature of the factoring unit. The creation of a factoring unit on TReDS shall result in automatic generation of a notice / advice to the buyer’s bank informing them of such units.
k) These factoring units will be available for financing by any of the financiers registered on the system. The all-in-cost quoted by the financier will be available on the TReDS. This price can only be viewed by the MSME seller and not available for other financiers. l) There will be a window period provided for financiers to quote their bids against factoring units. Financiers will be free to determine the time-validity of their bid price. Once accepted by the MSME seller, there will be no option for financiers to revise their bids quoted online. m) The MSME seller is free to accept any of the bids and the financier will receive the necessary intimation. Financiers will finance the balance tenor on the factoring unit.
n) Once a bid is accepted, the factoring unit will get tagged as “financed” and the funds will be credited to the seller’s account by the financier on T+2 basis (T being the date of bid acceptance). The actual settlement of such funds will be as outlined under the Settlement section. o) Once an accepted factoring unit has been financed by a financier, notice would be sent to buyer’s bank as well as seller’s bank. While the buyer’s bank would use this information to ensure availability of funds and also handle the direct debit to the buyer’s account on the due date in favour of the financier (based on the settlement obligations generated by the TReDS), the seller’s bank will use this input to adjust against the working capital of the MSME seller, as necessary (the TReDS procedures may, if necessary, also indicate that the proceeds of the accepted and financed factoring units will be remitted to the existing working capital / cash credit account of the MSME seller). If agreed by members, the TReDS may also provide the option to members, whereby the financiers would take direct exposure against the buyers rather than through their bankers. p) On the due date, the financier will have to receive funds from the buyer. The TReDS will send due notifications to the buyers and their banks advising them of payments due. The actual settlement of such funds will be as outlined under the Settlement section. q) Non-payment by the buyer on the due date to their banker should tantamount to a default by the buyer (and be reported as such as per regulatory procedures prescribed from time to time) and enable the banker to proceed against the buyer. Any action initiated in this regard, will be strictly non-recourse with respect to the MSME sellers and outside the purview of the TReDS. r) These instruments may be rated by the TReDS on the basis of external rating of the buyer, its credit history, the nature of the underlying instrument (invoice or bill of exchange), previous instances of delays or defaults by the buyer with respect to transactions on TReDS, etc. s) The rated instruments may then be further transacted / discounted amongst the financiers in the secondary segment. t) Similar to the primary segment, any successful trade in the secondary segment will also automatically result in a direct debit authority being enabled by the buyer’s bank in favour of the financier (based on the settlement obligations generated by the TReDS). In parallel, it will also generate a ‘notice of assignment’ intimating the buyer to make the payment to the new financier. u) In the event that a factoring unit remains unfinanced, the buyer will pay the MSME seller outside of the TReDS.In today’s regime, most of the banks are looking for digitised solutions hence attraction for Fintech segment has increased a lot in Banking Industry as well like other industries. Many banks have introduced digital bank accounts and has added huge customer base in a very cost efficient manner which shows the success & power of digital solutions. Many banks are partnering with many Fintech companies to enhance their offerings to customers. M1xchange is appreciated and utilised by the financiers as it provides access to large corporate & MSME customer base in cost efficient manner.The linkage of all stakeholders vide the digital platform benefit the entire Supply chain ecosystem and in specific to needs of financiers.M1xchange being RBI regulated TReDS platform provides opportunity to the financiers to get quality assets in the MSME space across a wide geography in minimal time, cost and effort. M1 automates the entire financing process, thereby, bringing down the turnaround time and enhancing customer experience.The key benefits to the financiers are as follows:Fulfill PSL (Priority Sector Lending) targets more efficientlyWith the TReDS kind of institutional mechanism, Financial Institutions have the opportunity to build a quality PSL asset portfolio in MSME space.Reduced Operational Cost and Reduced RiskM1 is a centralized system that facilitates Buyer, Supplier & Financier to come on same platform with one agreement binding all stakeholders. The approval of invoice by Buyer enhances transparency of transaction and their commitment. The ease of use is very high for the financiers as trail of the transaction is online and involvement of manual labour is limited to approving the transaction on the exchange. The connect with the customer is online and time for the transaction on the digital platform is reduced to minutes in a day. This being cost effective also provide financiers access to a MSME client base without any additional cost and infrastructure for onboarding.WAY FORWARDThe future of supply chain finance is reliant on partnerships and collaboration. It is important to ensure whether all functions (legal, risk, compliance and technology) are aligned and are ready to participate in highly collaborative market. Hence planning is required to ensure that we are operating in multi-bank platform in cloud, using distributed and smart contracts. There has been inclination towards multi-bank platforms since as this reduces the dependency on single institution.There is focus towards the approved payable finance. This product is understood by the market and there are plethoras of offerings which are eager to absorb the demand. There are multibank/financier platforms such as PrimeRevenue, procure to pay platforms with supply chain finance offerings such as GT nexus, bank proprietary platforms. Bank platforms are currently holding the lion share in approved payable finance solution.The most important areas of development and strategic focus for trade finance industry over this year is shown below with SCF being at the highest level. There has been generational shift both in terms of people and technology. SCF industry has been moving towards smarter ways of working that are much more digitised and automated .Innovative banks and fintechs are leading the way who are making full use of technology via mobile, internet etc. There is readiness from the users to go to the digital channels and trust them for contracting and and making full use of them to learn more about transaction and bring it to successful closing.Since there have been improvements in onboarding, we have now begun to see more SME suppliers being onboarded than before. The process is much more easier and efficient.By investing in technology, leveraging our global footprint and both listening and responding to our clients’ evolving needs, we remain at the forefront of the supply chain finance business? E-commerce–online with the current trend of Indian Economy moving towards online sales from offlline platforms banks have a huge opportunity to fund different supply chains.? Integrated Approach–Banks have the opportunity to fund both backward and forward integration with the value chain.? Focus on shorter periodic Assessments for flexible credit decisioning.? Templated Innovative products for New Startups like we can see that new age NBFCs like Capital Float, lendingKart are providing the supply chain solutions for ? Launching of some common platform/association of supply chain finance. TECHNOLOGY IN SUPPLY CHAIN FINANCESCF has been traditionally preserved for large corporates selected suppliers but with the incoming generation of digital platforms the financial and geographical barriers to participation has been removed. Such developments have given the opportunity for increased emerging market engagement in global supply chains. This has led to positive implications for world trade, opening up new trade corridors and potentially helping to boost global trade volumes.Technology has bought significant efficiencies to physical supply chain and even government is pushing the automation through facilitating trade and improving logistical efficiencies at ports through paperless clearance and customs schemes. But the financial supply chain is plagued and dominated by paper processes. Efforts are being done to optimise and accelerate working capital cycles by automating procure-to-pay and order-to-cash cycles. The factors that should be considered while selecting technology are automation, simplicity and scalability. Supply Chain finance solutions can take various forms ? use a bank-led platform, either developing an internal IT infrastructure or adopting another bank’s platform? contracting a bank-independent platform through: (a) Licensing the technology solution from a technology platform; (b) Outsourcing the automation services to a third-party platform such as Software as a Service (c) Participating in a marketplace as one of multiple funders These days fintech collaboration is making sense when it comes to solving issues relating to capital, credit, compliance and client origination. Partnerships between banks and fintechs are the way forward – providing a route to the market for fintechs, while reinforcing the role and expertise of banks and thereby reducing risk of undermining the market position of traditional providers. While there has been much focus on banks’ own platforms, innovation will also ensure that banks can work with third-party platforms, if so required by customers. What’s more, by leveraging application programming interfaces (APIs), it is possible for banks to integrate certain third-party offerings into their own platforms. APIs are therefore changing the way in which the industry can work together and interact – to the benefit of clients.Digital communication within a company and across entire supply chain has experienced a sharp rise in sophistication over last ten years. One of the key drivers being API(application programming interfaces. To solve specific use cases, such as SCF solutions, buyers can apply microservices, without having to open-up the overall core application and requiring an invasive IT effort. Example for the same is pre-programmed ERP add-ons, which enable clients to integrate their ERP-system with a web-based portal, run by bank-independent platform providers. These add-ons are pre-developed applications that provide the full functional spectrum needed to exchange data to and from the web-based portal via web-services automatically. Technology Is Making SCF Easier SCF has been around for years, but the rise of cloud-based SCF platforms has impacted SCF programs in three big ways: making them more effective, more efficient and easier to launch. The result is that the benefits of SCF have become available to a far wider range of companies than ever before.1. SCF has become more effective. Technology may enable more transparency between companies utilizing SCF and their suppliers who participate. Because everyone is on a network and has instant access to the same information, like visibility to payment terms and knowing exactly when the cash is coming, relationships with suppliers may also be improved.2. SCF is more efficient. Technology has enabled companies to reach out and onboard all suppliers instead of just the top suppliers and extend the benefits of SCF to all suppliers in a company’s supply chain. The result is more liquidity available across the entire supply chain, which could strengthen the buyer-supplier relationships.3. It’s easier to launch SCF initiatives. SCF providers are able to offer more value to companies through cloud-based platforms that provide a marketplace to source financing, supplier onboarding tools to engage with suppliers and powerful analytics to provide insights on how to optimize their supply chains as well as serving as the system of recordRecommendation for L&T FinanceProperly installed ERP system ERP (Enterprise Resource Planning) application provides technology solutions across different parts of business. SAP has many modules like CRM(Customer Relationship Management),EAM(Enterprise Asset Management), HCM(Human Capital Management),PLM(Product Lifecycle Management),SCM( Supply Chain Management),MM( Material Management), Finance and Procurement.From business credit perspective we are interested in only 4 modules like SCM, MM, Finance and procurement. SCM is used in manufacturing environment which ensures that raw material required for final product is available at correct time and place. This module is linked to MM module which links the manufacturer with the raw material supplier and is highly automated, hence the orders are placed automatically and information about delivery of goods and their invoicing is also automated. A system of EDI (Electronic data interchange) is used for the automation. Procurement module contains the details of the approved suppliers, called the Vendor master table. All the details about the new supplier is registered on this table which contains details regarding the commercial agreement with supplier, payment method and payment terms. Procurement module is also linked to the front-end systems, such as e-procurement, that is used to place orders and the Finance module that is used to raise Purchase orders and pay the suppliers.Finance module also maintains accounts payable system. When purchase order is raised, it creates liability for the company. Once invoice is received and the payment is authorised, liability is closed and the cash account is debited.Now SCF market is maturing, there is trend towards cloud based solutions which leads to lower operational costs. This move to cloud based systems allows ERP systems to link directly to other cloud based enterprise solutions like electronic invoicing.ERP combined with more streamlined and efficient workflow of an effective SCM will provide LTFS wide range of important advantages like• Improved efficiency across multiple departments and organisations working within supply chain• Increased customer retention with improved customer service and chance of repeat business opportunity.• Automation of workflow leading to reduced overhead and operational cost• IT issues and problems are less likely to create bottlenecks to impede efficiency• Supply chain solutions can be easily adapted to meet the needs of changing circumstances or future business growth& expansion.BLOCKCHAIN/BIG DATA and CLOUD BASED PLATFORMS IN SUPPLY CHAIN FINANCEWhen any financing institution puts any corporate customer at the centre, they have to follow a peculiar business dynamics that influence and shape the client’s business decisions. Since the quality of supply chain relationships and trust are prerequisite for SCF excellence, blockchain based applications could provide the solution that consolidates and entrusts the collaborative relationship of those parties. Blockchain based smart contracts can be used to “consume” supply chain data exchanged between manufacturers, retailers and their suppliers to better serve collaborative supply chains and anticipate SCF business needs(ie. discounting a batch of invoices , apply for pre-shipment finance etc). Blockchain based data collection will allow to create innovative company credit risk models.Traditionally, buyers and suppliers interacted through poorly recorded means of communication like spread sheets, emails, and phone calls. Because these communication methods were limited and point-to point, often even the direct parties involved— the buyers and suppliers—couldn’t say if, let alone when, a crucial supply chain milestone had taken place. Finance providers didn’t even have direct access—they relied on buyers and suppliers to provide them with information. Cloud-based supply chain networks have become a popular way to connect buyers, suppliers, and third parties together. In a supply chain network, all transactions take place on a single, shared platform. Once finance providers connect to these cloud-based supply chain networks, they can create innovative financing programs that buyers and suppliers can rely on to free up working capital, cut costs, and improve operationsWhen finance providers received documents through faxes, emails, phone calls, couriers, and EDI, information was document-based, not data-based. So in order to evaluate buyers and suppliers and their transactions, finance providers had to collect information manually. Credit history thus became the main metric for offering supply chain finance, because it was traditionally the best way to assess risk. Now supply chain network has changed. The information model has become simple and powerful as it creates business networks that securely connect many organisations together and leads to seamless collaboration on physical and financial transactions.All engagement between organizations (documents, notifications, and communications) occurs through a common platform, there’s a single clear record of what happened, when, to whom. That end-to-end visibility obviates the need for finance providers to rely on traditional methods like credit history and post-invoice-approval to become engaged in supply chain finance.YES BANK was one the Banks in India to successfully implement innovation in Supply Chain Finance using Blockchain and API Banking. YES BANK collaborated with IBM to use their Hyperledger fabric and uses a Smart Contract.Recommendation for LTFS We should have have dedicated team of IT and product specialists to handle structured trade finance deals , strategic tie ups with many international financial institutions and provide digital solutions to ensure seamless day to day trade transactions. There are companies like IBM who are very active in this area and they have partnered with companies in China and India to work on new blockchain based technologies. They have teamed up with Danish logistic and transport company Maersk Line, to create a new solution to digitize the global, cross-border supply chain using blockchain technology. Start-ups are at the same time popping up to help bridge the gap to this new technology, such as blockchain-based financial operating network Fluent, which aims to streamline supply chain finance.NEW PRODUCTS AND SECTORSExplore L&T business like L&T Heavy Civil, Hydrocarbon, Electric and automation, L&T InfoTech, L&T IDPL, L&T Metro rails. L&T Construction has recently bagged various contracts like a contract of Rs. 4353 crore in its power transmission and distribution business in both domestic and international markets, Rs 3191 crore order from the Dhaka Mass Transit Company for construction of a railway line for Dhaka Metro and also Rs 1058 crore order won by Water and Effluent Treatment business from Udaipur smart city Limited for Integrated Infrastructure package of ABD area of Udaipur city. This one opportunity area where LTFS can look for potential business. Further LTFS can look for less tapped potential industries like logistics, commodities, electrical & electronics, consumer durables, FMCG& Agro based Industries can be used to finance their Supply chain.We can add more products like E-commerce seller finance The online seller finance had high potential for growth in India. An ecommerce merchant strives to stay ahead of competition but they are faced with many challenges like lead times, inventory management during peak and lean seasons, pricing decisions and customer expectations. Inorder to achieve growth on B2C marketplaces , a finance provider is required which can provide right credit solutions for the business. So , Online seller finance plays an important role in growing marketplace sales exponentially.Capital Float has partnered with many online marketplaces in India which include Amazon, PayTM, Snapdeal, Myntra, Shopclues, eBay, etc.Their partnerships with these e-commerce platforms help merchants access fast and flexible working capital loans to operate optimally. Recommendations for LTFS Flipkart has tied up with 5 financial institutions, including Axis Bank and Bajaj Finserv, to provide loans ranging from Rs.1,00,000 to Rs.2 crore to its sellers in 2015. Company wants to shift to marketplace model from inventory based model and they ran a pilot financing programme for about its 100 sellers. They have planned to launch an initiative called Growth Capital for its entire platform. Third party merchants can apply for the loans on its back-end platforms but the company will select sellers based on customer ratings, sales growth and their service quality levels. This is possibility for LTFS to collaborate with them.Taking an example of SMECorner who have tied up with Snap deal, Flipkart and Paytm, among the ecommerce players and they play and important role to secure easier loans for sellersLOAN ORIGINATION AND MANAGEMENT SYSTEMProper loan origination and management systems need to be installed. These systems employ workflow technology to control and monitor the various work steps in loan processing and and use digital imaging technology to reduce the delays and inefficiencies in handling paper documents. They provide end to end support for loan processes (identification of customers’ needs, loan simulation, filing an application, making a loan decision, signing an agreement and disbursing the funds), loan approval process automation(Configurable underwriting algorithms take into account the credit offer conditions comparing to the customer’s financial standing, its scoring/rating and results of its verification in different databases), reduce the risk of error ( ensuring data correctness and consistency)REFERENCES