Supply chain finance (SCF) is a hot topic among businesses of all sizes. Companies are constantly seeking strategies to stabilize their supply chains, limit the hazards of global trade transactions, and build more efficient working capital arrangements as commerce becomes complicated.
SCF programs are used by many big multinational corporations (MNCs), particularly those with good credit ratings, to unlock liquidity and strengthen the financial supply chain. SCF programs also help SMEs (small and medium enterprises), which play an essential part in a country’s overall production networks and are critical to a developing nation’s economic progress.
Asia’s SCF Laws and Governmental Policies
Every country has its own set of hard-and-fast rules and procedures for trade and lending. Therefore implementing a supply chain financing program requires fulfilling particular criteria that vary by jurisdiction and keeping in mind the government policies and general outlook towards SCF. Let’s look at such laws and policies from a few Asian countries.
According to The Economic Times, India’s micro small & medium enterprises (MSME) sector plays a vital role in contributing to 30% of India’s GDP and 50% of exports while employing 110 million people. However, several factors stunt the growth of MSME SCF lending. Since access to formal credit continues to be a challenge for Indian MSMEs, the majority of the MSMEs take loans from informal sources of finance at usurious rates.
However, this situation is changing. In 2011, India introduced the Factoring Regulation Act to establish a unified legal framework for Supply Chain Financing. In January 2022, RBI revised it to further facilitate lenders by permitting all existing non-deposit-taking NBFC-Investment and Credit Companies with asset sizes over Rs 1,000 crore to undertake factoring business subject to certain conditions. This move significantly widened the financing opportunities for MSMEs by increasing the number of eligible NBFCs/NBFC-Factor from 7 to 182.
Additionally, under India’s goods and services tax (GST) regime, data on these businesses’ financial health is readily available via monthly reports, invoices, and e-way bills, and this is a game-changer for banks and financial institutions that offer SCF. GST and e-way bills will propel supply chain financing forward, fraud will decrease as firms are correctly taxed, and due to the more straightforward underwriting procedure with a good paper trail, more lenders will be encouraged to venture into supply chain finance.
However, there was a need to regulate data sharing. Hence, in order to facilitate secure data sharing, RBI licenses what are known as account aggregators, who can manage and move data on behalf of consumers, upon their request/consent. The account aggregator network is industry agnostic but it finds its biggest application in various lending functions like onboarding, verification, and credit assessment.
The government of Thailand is loosening the restrictions to make it easier for small and medium-sized businesses to get loans from financial institutions. The government also encourages SMEs to adopt digital technologies to facilitate their growth. The finance minister made this clear while launching a digital supply chain finance platform at an event co-hosted by the Thai Bankers’ Association (TBA), the Finance Ministry, the Bank of Thailand (BoT), the Federation of Thai Industries, the Board of Trade of Thailand, and the Thai Retailers Association. The digital supply chain financing platform will be a crucial engine of economic growth. The central bank established the digital supply chain financing initiative for businesses in conjunction with the private sector to increase businesses’ access to capital. This initiative will transition firms from paper-based trading to digital commerce (e-invoices, e-tax invoices, and e-payments).
Read more on ‘Future-proofing Trade Finance through Integrated Platforms‘.
While Singapore’s economy has recovered from Covid-19, many SMEs continue to face the same age-old challenges, notably supply chain finance.
According to the Singapore Business Federation National Business Survey 2019/2020, sustaining a constant, positive cash flow was one of the top issues encountered by 35% of SMEs. Although the Singaporean government has established several support packages to aid SMEs, roadblocks still exist. SME lending platforms have stepped up to address the supply chain funding gap. Vendors and partners receive instant funding right when they need it – at the start of the payment cycle.
Nations around the world have become far more interconnected during the past few decades. In what can be called a “statement move,” in April 2021, the BoT and the Monetary Authority of Singapore (MAS) launched a first-of-its-kind program to integrate their respective national payments systems (PromptPay and PayNow) to ease cross-border transactions. Businesses have relied on traditional bank transfers and remittances to send money across borders in the ASEAN region. Consumers and businesses can facilitate faster, cheaper, more inclusive, and more transparent cross-border payments through just a few clicks on their mobile phones.
In Vietnam, SCF is still new and restricted. According to KPMG, the SCF market in Vietnam had a $50 billion potential by 2021, but only a tiny portion of it has been realized.
The International Finance Corporation in Vietnam, which works with several high-profile companies, is confident that the SCF market in Vietnam, like other emerging nations, is promising. If correctly implemented, the models proposed by IFC’s founding team will provide effective working capital solutions for a wide range of economic sectors.
Supply chain finance has experienced rapid growth, but for wider adoption, attention should be directed to various regulatory issues that might affect its development.
Fintechs’ rising prominence and importance.
Despite its advantages, SCF has not taken off in some countries due to a lack of digitization, making assessing the borrower difficult. Partnerships with fintech companies are highly advantageous for banks looking to leverage new technology that can help with digitization.
For instance, in India, fintech companies use technology and leverage the invoice and e-way bill data available with GSTN for assessment. GSTN (Goods and Service Tax Network) is a private, non-profit organization. Fintechs use GSTN to enable buyers and sellers to build a digital trading connection and evidence of product delivery. They also digitize end-to-end transaction workflows.
Furthermore, from the GSTN, fintechs can quickly verify whether a loan applicant provides the correct financial information by comparing real-time information. Fintech can help SCF lenders reduce and, in some cases, eliminate potential defaulters by analyzing GSTN data.
According to the IFC, 65 million companies in developing countries, or 40% of formal MSMEs, have an annual unmet funding demand of $5.2 trillion, which is 1.4 times the present level of global MSME lending. East Asia and the Pacific account for the most significant portion of the global financing gap, around 46%.
Supply chain financing can help bridge this gap. Supply chain finance ensures increased credit coverage, lower costs, and fewer collateral requirements for borrowers while improving loan credit quality. As a result, supply chain ties will become more strategic, resulting in new clients for financial institutions, which will have a multiplier impact on the economy, increasing government revenue and lowering tax rates.