India’s supply chain, an essential component of its quickly developing economy, is presently going through a significant digital revolution. Artificial Intelligence, which is drastically changing the field of supply chain finance, is leading this transformation. India is leading the way in creating a more inventive and robust financial ecosystem within its supply chains by utilizing AI to increase operational efficiencies. AI in Supply Chain Finance Artificial Intelligence is revolutionizing Supply Chain Finance (SCF) in India by using its capability to process vast volumes of data with unparalleled speed and precision. Here’s how AI is transforming the landscape: Credit Risk Assessment: AI-powered algorithms are redefining credit risk evaluation by analyzing extensive financial data, payment histories, and market trends. This enhanced analytical capability allows for more accurate and efficient assessments of creditworthiness, facilitating quicker decision-making and minimizing risk for lenders. Fraud Detection: AI excels in identifying anomalies within transaction patterns, serving as a robust defense against fraudulent activities. By detecting irregularities early, AI safeguards both lenders and borrowers from potential financial losses and ensures greater security in financial transactions. Invoice Processing: AI-driven optical character recognition (OCR) technology automates the extraction of data from invoices, significantly reducing manual input and minimizing errors. This streamlines the invoicing process, enhances accuracy, and accelerates payment cycles. Predictive Analytics: With its advanced predictive capabilities, AI can forecast cash flow, demand patterns, and potential supply chain disruptions. This foresight enables businesses to make proactive decisions, optimize working capital, and better prepare for future challenges. Supply Chain Optimization: AI identifies and addresses inefficiencies within the supply chain, such as inventory mismatches or transportation delays. By offering actionable insights and recommendations, AI helps businesses reduce costs, enhance operational efficiency, and achieve a more streamlined supply chain. In summary, AI’s integration into supply chain finance not only enhances accuracy and efficiency but also provides a strategic advantage in navigating the complexities of modern financial operations. Impact on Indian supply chain finance While the full potential of AI in India’s SCF is yet to be realized, early indicators are promising. A study by McKinsey Global Institute estimates that AI could add up to $1 trillion to India’s GDP by 2030. While specific data on the impact of AI on SCF in India is limited, the broader trend of digital transformation and the increasing adoption of AI across sectors suggest a significant positive impact. Despite the immense potential, challenges such as data quality, infrastructure, and regulatory hurdles need to be addressed for widespread AI adoption in SCF. However, the opportunities for innovation and growth are significant. AI has the potential to revolutionize supply chain finance in India by improving efficiency, reducing costs, and mitigating risks. As the technology matures and becomes more accessible, we can expect to see even more groundbreaking applications in this space.
Tag: supply chain
Best Practices for Financial Institutions Seeking Entry into SCF Space
Globally, supply chain finance (SCF) remains an untapped market. According to McKinsey, more than 80% of eligible assets do not benefit from working capital finance. Even the remaining assets are undercapitalized. Digital usage has facilitated changes in MSME financing, increasing the accessibility and availability of SCF. SCF benefits corporate purchasers by securing inventory with extended payment terms, and suppliers can gain security for forward orders. Banks and NBFCs providing SCF enjoy recurring transaction volumes that allow them to push more capital market products. The RBI has implemented a number of efforts to encourage SCF growth in order to assist MSMEs. The Trade Receivables Discounting System (TReDS) and Account Aggregator (AA) frameworks integrate collected financial data to promote transparency while protecting privacy. This enables providers and buyers to use numerous financing choices in a seamless manner. SCF’s Hybrid Fintech Strategy Banks continue to struggle with SCF, owing primarily to the traditional approach. Cloud computing, artificial intelligence, machine learning, and blockchain approaches can all help financial institutions strengthen their fintech strategy. Banks must devote more time and resources to SCF, owing to the information asymmetry between SMEs and financial institutions. As a result, the priority must be to ensure consistent operations while strengthening security. Legal Compliance Fintech technologies will assist financial institutions in reinforcing legal compliance. Furthermore, these banks and non-banks should carefully consider their strategies in light of competition activities. In some circumstances, a cautious approach may be appropriate. An aggressive strategy will aid in capitalizing on the market’s potential. However, the fintech strategy should guarantee that risk tolerance is determined correctly. Decentralized Technology When new options are investigated, technology should be used in such a way that existing customers are maintained. Fintech entrepreneurs can construct decentralized blockchain platforms with well-researched business strategies and suitable partners to increase trust among SCF players. Security Financial institutions’ major priority is security. The fintech platform must provide traceable transaction records and ensure trustworthy data storage. Integration More attention should be paid to integrating legacy systems and new fintech platforms so that the SCF platform does not become more complex. Banks can leverage the co-lending model to issue loans while offloading operational costs to NBFCs, which already thrive at exploiting technology APIs. SCF at the highest level Lending banks should use a deep-tier SCF approach to help MSMEs avoid supply chain constraints. This strategy will aid in the funding of smaller suppliers, who serve as the backbone of the supply chain ecosystem. AI and ML automation Firms in need of capital and lending banks can be more precisely matched by applying ML and AI models on TReDS platforms. To eliminate duplicating funding, centralized data storage and access should also become required. Currently, corporations launch SCF programs in collaboration with banks. Multi-funder solutions that bring together multiple financial institutions will boost SCF resilience in the future. AI-powered fintech solutions enable banks to better analyze credit health for modern credit ratings. According to IBEF, more than 70% of MSMEs require working capital loans; SCF can help these businesses grow by providing a suitable funding solution. Once SCF is established, those in need of cash help can fulfill their demand in a matter of hours, allowing the business to spread.
Introducing Supply Chain Finance
Supply Chain Finance (SCF) is a technology solution that lowers financing costs for buyers and sellers. It tracks invoice approval and settlement and automates transactions to improve the efficiency of all the parties involved in a sales transaction. The supply chain financing market is expected to reach a CAGR of 17.1% by 2024. According to Mckinsey reports, SCF eligibility will increase from less than 40% to as much as 80% in the upcoming years as supply chain leaders are looking for better solutions. By 2031, the supply chain finance market is expected to reach $13.4 billion. Indian Supply Chain Financing Ecosystem Challenges Compared to global trends, India’s supply chain financing (SCF) is still nascent. Indian MSMEs employ more than 11 crore people and contribute 29% of the GDP. Also, 70% of MSMEs require working capital funds. However, SCF remains inaccessible due to the legacy banking systems. Many MSMEs don’t meet the banking requirements criteria. The estimated credit gap is Rs. 20-25 trillion. This credit gap forces the MSMEs to approach third-party lenders, which results in higher costs, stunted growth, low profitability, and a volatile business model. The COVID economic disruption doesn’t help either. The low-cost SCF option provides extended financing for MSMEs and helps lenders manage credit risks. Source: Allied Market Research According to the new Factoring Regulations Act 2011, more than 182 NBFCs can now offer factoring services. Previously, NBFCs could meet only 20% of the funding requirements for MSMEs. Digitisation Is Paramount To SCF Innovation Digitisation is the key to achieving seamless SCF solutions for Indian MSMEs. Businesses will have access to more customised SCF products that help increase the working capital. Apart from invoices, businesses can benefit from other fintech offerings such as a letter of credit, import and import bills, shipping guarantees, performance bonds, and more. Technology innovations such as fintech digital delivery, industry utilities, API technologies, and blockchain bring supply chain financing closer to SMEs. With the non-availability of credit history, lenders can use AI-based risk assessment solutions to evaluate creditworthiness. Such solutions also predict business growth, enabling lenders to offer SCF financing. Source: PWC Fintechs can bring about innovation in SCF solutions in the following ways: Incorporate API-enabled services using a customer-centric tech stack. Use data to understand supply chain networks to innovate new opportunities. Use blockchain-distributed ledgers to improve the transparency of the financing platform. Introduce innovative products such as CAPEX discounting, invoice discounting, warehouse receipt finance, dynamic discounting, early cycle discounting, and SCF securitisation. Various initiatives from the Government of India encourage SCF. The fintech platforms can use the existing rails to improve their SCF offerings in the following ways: Leverage TReDS and GSTN linking to understand MSME cash flows for invoice financing better. Use the AA framework to provide financing options for suppliers and buyers. India’s addressable supply chain market is estimated to be Rs. 60,000 crores, while the total market value is Rs. 18 lakh crore. Digital supply chain solutions facilitate fully trackable transactions to seamless trading between buyers and suppliers.