Arun Poojari is a Co-founder & CEO of Cashinvoice.in and has over 17 + years of rich experience in the Financial Services Industry, of which ~12 years he has directed several corporate segments at Tata Capital. In his role at Cashinvoice, Arun provides strategic direction and leads the team towards achieving rapid growth and profitability. As Cashinvoice gears for its growth, the company will benefit from his experience and expertise. He has previously worked with ICICI Bank and Pidilite Industries and has also pioneered distributor finance in the non-automobile industry.
Supply Chain Finance (SCF) in India is under the purview of The Reserve Bank of India. The Central Bank and The Government of India have taken various initiatives to promote SCF as a cost-efficient mode of credit access to meet the working capital requirements of large corporations and Micro, Small, and Medium Enterprises (MSMEs).
The Factoring Regulation Act and its Amendments
The Factoring Regulation Act 2011 was introduced to establish a unified legal framework for Supply Chain Financing in India. Over the years, there have been multiple amendments to overcome the shortcomings and challenges faced by borrowers and lenders.
The 2011 Act mandated NBFCs to remain in the Factoring business only if factoring was their primary focus area; over 50% of their revenue was earned from the factoring business, and 50% of the assets were deployed for the same.
In 2020, an amendment was passed to remove the threshold criteria to ease NBFCs’ participation. The tedious process of reporting factoring information within 30 days of the transaction was also terminated. The changes aimed to encourage non-banking lenders to help businesses cope with post-pandemic losses.
In January 2022, RBI further eased the path for lenders by permitting all existing non-deposit-taking NBFC-Investment and Credit Companies (NBFC-ICCs) with asset sizes over Rs 1,000 crore to undertake factoring business subject to certain conditions. This move significantly increases the number of eligible NBFCs from 7 to 182, and NBFC-ICCs can also register as NBFC-Factor to enter this lending segment.
Regarding TReDS settlements, RBI has proposed to hike the NACH mandate limit from Rs 1 crore to Rs 3 crore. This has opened doors for larger transactions on TReDS platforms and was primarily done to address the increased liquidity needs of MSMEs and requests received from Trades Discounting Receivables Systems (TReDS) platforms.
Challenges faced by Participants
NBFCs have welcomed the new developments. However, they still face some challenges and hope to be addressed soon. Factors are concerned about receiving timely approvals from RBI, as they have to apply for an additional license to enter the supply chain financing segment. Also, NBFCs with asset sizes below Rs 1,000 crore have additional requirements, hindering their scope for SCF space expansion.
Lenders face higher risk while lending to MSMEs due to a lack of credit history or low credit score. They also have to absorb the risk of unpaid invoices while providing factoring without recourse.
Financial institutions need to closely watch borrowers’ alternate data and repayment patterns to avoid piling of debt. Since they do not have the expertise to analyze sizable alternate data sets like e-invoices, repayment patterns, GST data, etc., they can partner with fintechs to help them get deep insights with Artificial Intelligence (AI) and Machine Learning (ML) techniques.
Limitations for Cross Border Trade
Supply Chain Financing has been gaining momentum in recent times. However, in today’s globalized and digital world, the Indian policy framework is limited to domestic supply chains, unlike many countries with accommodative SCF regulations to support cross-border trades.
The primary task of SCF is to make early payments to suppliers on behalf of their buyers. But this cannot be done quickly for cross-border trades. The RBI rule requires the financial institution to onboard the international supplier and then make payments in compliance with the RBI foreign exchange regulations. This in turn makes the process complex and accessible to large corporations through letters of credit. The complexity increases the cost of funding, raising lenders’ apprehensions.
The Make in India initiative aims to move the supply chain from outside the border to inside India by importing parts and assembling them locally. Manufacturers of automobiles, electronic goods, pharmaceuticals, etc., have more complex offshore sourcing supply chains and require more complex financing. A cost and time-efficient supply chain financing process can address the concerns of various sectors.
SCF platforms are bridging the gaps by providing robust digital infrastructure. With the growing interest of financial institutions in SME lending, there is a growing interest in SCF. The time is apt for integrating technology with a harmonious regulatory framework that genuinely reflects “Ease of Doing Business” and helps scale up the “Make in India” initiative.