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Supply chain trade finance is the international version of a well-known financing technique, widely used across India. This technique is, of course, “supply chain finance”. Supply chain finance is well known in India but it only works domestically. Most large companies have supply chain finance programs. These are useful to get early payments to suppliers funded by banks, whilst big corporate buyers enjoy credit terms. Suppliers are happy because they get their payments promptly; the bank earns a credit spread and the buyer gets to manage his working capital.
These programs are widespread and well developed – but in India, they do not work cross border. There are many reasons. The main issues include compliance concerns and regulation which restrict Indian banks from making early payments direct to international suppliers.
But there is now a solution, launched in India late in 2020 called supply chain trade finance (“SCTF”).
Supply Chain Trade Finance
It is the cross-border version of the domestic product that has been so popular. Using SCTF, Indian corporates can enjoy the same cost savings and efficiencies with their international suppliers, as they do domestically. This reduces the costs of imports, which increases the efficiency of the Indian industry. It, thus, reduces prices on the streets and makes India more competitive.
2021 is expected to be the year when this product becomes established. As world markets start to return to normal, trade resumes and Western economies come out of lockdown, we can expect a global bounce back. India is slowly getting ready for this. In fact, the recent budget included a lot of help for the Indian industry. With the Make in India campaign continuing, improving the efficiency of imports is high on everyone’s agenda. This is an essential step for the Make in India program to deliver good results. Making in India also means that we need to build more complex industrial supply chains. We also need to purchase more components and raw materials.
Benefits of Supply Chain Trade Finance
SCTF reduces the time it takes to deliver early payments to exporting suppliers and substantially reduces the costs. Most Indian importers are using a usance letter of the credit system. The typical cost of this system is 3 or 4% on the landed goods. It further depends upon the size of the shipment involved. It can take 30 or more steps with the banks involved, and often 10 days or more to get cash to the exporter. Moreover, the importer and exporter pay twice for the money. The local bank charges the importer for the usance period. On the other hand, the exporter also pays himself to discount the deferred payment obligation. One amount of money, two balance sheets, two sets of charges.
Compared to the letter of credit, SCTF trades are typically processed on the same day. The exporter receives his funds in less than 6 steps. This is achieved by connecting importer and exporter together directly – and coordinating them with one or more Indian bank funders. This direct connection reduces the complexity of the process dramatically – it all happens online – with a simple process. SCTF trades can deliver early cash to exporters at shipment for Indian importers without LC. The costs, on the other hand, are usually half or less of the LC alternatives.
Conclusion
It is too early in 2021 to predict how quickly SCTF will take over from LC; especially given the uncertainties that the pandemic brings to economies and trading volumes. On the other hand, the early take up of the new system is already good. There should be further providers emerging during the year as the product becomes more mainstream. As greater efficiencies emerge in the financial ecosystem, benefits should feed through into India’s international competitiveness and lower prices on the street for India’s consumers. So this should be a good year ahead!