Deep Tier Financing is a business solution that leverages business relationships within the supply chain. It focuses on providing working capital to small downstream suppliers in Tiers 2, 3 and so on bringing transparency and visibility across the value chain. The Deep Tier Supply Chain Financing (DTSCF) system enhances liquidity and traceability, minimizes financing expenses and risk evaluation, and decreases the overall cost of goods.
One of the significant issues in the global trade system is the trade financing gap. The Asian Development Bank (ADB) has reported that the worldwide trade financing gap grew from $1.5 trillion in 2018 to $1.7 trillion in 2020. Economic and financial uncertainties since the pandemic increased the gap by another $2 trillion. MSMEs have borne the brunt of this gap, with challenges ranging from low financial and technological literacy to inefficiency in providing collaterals and compliance requirements.
However, the digital transformation of the supply chain ecosystem offers a ray of hope for MSMEs. Technological advancements have ushered in an era of enhanced transparency and traceability, significantly benefiting various sectors and industries. Fintechs are leveraging technology in the lending space with custom-made models to help overcome credit history and score challenges. Artificial Intelligence provides insights and predictions based on alternate data like GST, transaction history, market trends, sectoral trends and local and global economic factors. Blockchain technology allows supply chain finance to broaden its horizon for lending to cross-border trades.
The future of Deep Tier Supply Chain Finance is bright. The contribution of MSMEs to the national and global GDP is commendable. Exports, manufacturing, and many other industries need a robust and thriving supply chain. This scenario will give rise to competition and, in turn, scale the pace and offer customizable options and innovative solutions for everyone across the tiers.
Deep Tier Financing provides a platform where reputation and relationships can make capital accessible to even the smallest supplier and help grow their business. This can help MSMEs drive initiatives like ‘Make in India’ and ‘Atmanirbhar Bharat’ forward. The pandemic brought new challenges and supply chain disruptions, and the subsequent Covid-19 waves made it more challenging. However, the MSME sector bravely managed to beat the odds and find its way out to thrive. Deep Tier Financing can help MSMEs meet their working capital requirements and manage operating cycles.
Digital Infrastructure for MSMEs in India
Digital infrastructure plays a critical role in enabling deep-tier financing in India. It refers to using digital technologies and platforms to promote more accessible, faster, and more affordable access to finance for micro, small, and medium-sized enterprises (MSMEs), primarily in rural and semi-urban areas.
The Government of India and fintech players are working towards building the digital infrastructure that can support the growth of MSMEs.
The following are some of the key initiatives that have been launched:
Digital India Program: The Digital India program aims to provide universal access to digital services to all including MSMEs. The program seeks to transform India into a digitally empowered society and knowledge economy by providing access to digital infrastructure, services and applications.
The program includes initiatives like the BharatNet project, which aims to connect the country’s 250,000-gram panchayats through high-speed internet connectivity. This initiative will facilitate access to digital financial services for MSMEs in remote locations.
Account Aggregator Framework: The Account Aggregator Framework is an initiative launched by the government to facilitate the exchange of financial information between financial intermediaries. The framework allows MSMEs to share their financial data with financial intermediaries, who can use it to provide customized credit solutions.
Under this framework, account aggregators are intermediaries between MSMEs and financial institutions. They collect financial information from MSMEs and share it with financial institutions with the MSME’s consent. This process eliminates the need for MSMEs to provide physical copies of their financial records to multiple financial institutions, saving time and effort. The Account Aggregator Framework also ensures data privacy and security by mandating that account aggregators adhere to strict data protection guidelines.
e-invoicing: e-invoicing is another digital infrastructure initiative launched by the government to streamline the invoicing process for MSMEs. The system enables MSMEs to generate and share invoices with their customers in a standardized format.
The e-invoicing system aims to improve the transparency and efficiency of the invoicing process, leading to faster payments and improved cash flows for MSMEs. The system also eliminates the need for manual data entry, reducing errors and improving invoicing accuracy.
Digital Payment Systems: Digital payment systems like Unified Payments Interface (UPI) and Bharat Bill Payment System (BBPS) have enabled MSMEs to easily accept and make digital payments.
UPI (Unified Payments Interface) is a cutting-edge payment system that facilitates real-time funds transfer between bank accounts, ensuring instant and hassle-free transactions. On the other hand, BBPS (Bharat Bill Payment System) is an efficient bill payment platform that empowers MSMEs to conveniently settle utility bills, taxes, and various other invoices digitally. UPI and BBPS revolutionize transactions, providing seamless and secure payment solutions for MSMEs and promoting a cashless economy.
Digital payment systems have eliminated the need for cash transactions, making payments more secure and efficient. They have also enabled MSMEs to access credit more efficiently by providing a digital record of their transactions and payments.
TReDS and Deep Tier Financing
Trade Receivables Discounting System (TReDS) is revolutionizing financing for Micro, Small and Medium-sized enterprises (MSMEs) in India by offering a unique platform for discounting and converting their trade receivables quickly into cash. Invoices of 48,000+ MSMEs valued at Rs 150,000+ crores have been financed till date on TReDS and volumes are doubling consistently on all TReDS plaftorms. This transparent and efficient system is helping MSMEs overcome traditional financing hurdles such as lack of collateral, credit history, and high transaction costs.
TReDS is now a proven model solving the cash flow problem at one end of the supply chain (MSME supplying to a Corporate). Scaling up of TReDS is enabling other fintechs to customize offerings to facilitate financing at various legs in the supply chain (eg: MSME sourcing raw material, Corporate supplying to Dealer, Wholesaler to Distributor etc). TReDS is therefore paving the way for deep-tier financing to evolve in India.
The Future of Deep Tier Supply Chain Finance
Deep Tier Supply Chain Finance is becoming another financing method based a strong digital framework. The contribution of MSMEs to the national and global GDP is commendable. Exports, manufacturing and many other industries need a robust and thriving supply chain. It also means that supply chain finance will be required to meet the demands of suppliers across all the tiers, making Deep Tier Supply Chain Finance play a pivotal role in the country’s economic growth. This scenario will give rise to competition, in turn, scale the pace, improve the offer of customizable options and innovative solutions for everyone across the value chain.
Deep Tier Financing would be a great platform where reputation and relationships can make capital accessible to even the smallest supplier and help grow the business.
The writer is MD & CEO for Invoicemart.
