B2B finance: A state of friction

B2B finance: A state of friction

By Vinod Parmar

Financial institutions are fueling the economic and industrial recovery across India. These finance institutions include banks, NBFCs, FinTechs etc. How the B2B finance sector faces a state of friction? What are the changes coming in the B2B finance sector and what’s the way forward?

There are nearly 16 million micro and small enterprises that are unserved by traditional lenders, despite being ongoing, creditworthy businesses. This has resulted in a whopping $450 billion gap between demand and supply for trade finance. The result – delayed payments, missed sales and relationship tensions that are felt by everyone in the supply chain, small or large.

The problem arises because financial institutions (FI) and non-banking finance companies (NBFC) unable to reach, assess, finance and service Small and Micro-enterprises viably. Hence, they are unable to offer competitive financing to the MSMEs.

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The paperwork requirements from various financial institutions like banks, NBFCs, FinTechs are time-consuming and frustrating for MSMEs to comply with.

Moreover, their paperwork requirements are time-consuming and frustrating for MSMEs to comply with, and even if all that were to work out – the process of actually accessing funds come with their own pain points.

The MSMEs end up borrowing expensively from informal sources or not at all – either way, it causes cascading friction in the entire supply chain. This has a dampening impact on the Indian economy as a whole since the MSMEs contribute nearly 40% of India’s GDP.

MSMEs that contribute nearly 40% of India’s GDP, borrow expensively from informal sources or not at all.

This is not a new issue, and the ongoing Coronavirus pandemic has only accentuated it further. So, we are left with a situation where the banks and large companies are flush with funds, but money doesn’t flow smoothly through the chain.

B2B finance

Technology and insight: The keys to unlocking the chain

Digitisation and technology will lay a key role in easing the impasse. The FinTech companies are able to track relationships between the large companies and their smaller supply chain partners in order to establish the credit-worthiness swiftly and cheaply.

By leveraging the upstream invoice and GST data, we are able to use technology to complete risk assessment at greater speed and low unit economics. And all of this with minimum interaction with the MSMEs concerned. This ability is key to our ability to deliver the affordable and easily accessible financial solutions to anyone on the supply chain.

Along with technology, it is also important to understand the constraints of MSMEs in terms of availability of time and resources for paperwork and process.

Along with technology, it is also important to understand the constraints of the MSMEs in terms of availability of time and resources for the necessary paperwork and process. The MSMEs are already time and resource-starved – and they need easy, well invisible processes.

We must ensure that we use the technology to make things simpler. Once onboarded on a financing program, we have developed a one-click payment disbursement method, so that the borrowers can focus on what they do best i.e. running their business.

Various macro initiatives that will unfold in the next few years are also set to redefine B2B finance.

A changing ecosystem

Various macro initiatives that will unfold in the next few years are also set to redefine B2B finance. E-Invoicing is already underway and sets the stage for making financing based on approved invoices more seamlessly achievable. While it is still in its early days, TReDS is another initiative that will make an impact in the days to come.

And then there are other far-reaching ecosystem innovations that are in the pipeline. OCEN (Open Credit Enablement Network) – a credit protocol infrastructure that will create a common, standardized language across Lenders and the marketplace.

The Open Credit Enablement Network (OCEN) is a credit protocol infrastructure that has been innovated as a far-reaching ecosystem to set up a common and standard language across the leaders and marketplace, bolstered by the Account Aggregator (AA).

This will be bolstered by the Account Aggregator (AA) – entities that will collect and transfer the financial and taxation information of borrowers to the lenders, securely and with the borrowers’ consent.

Of course, there are platforms that will leverage Blockchain/DLT, AI/ML, to make transactions between all stakeholders more secure, swift and transparent. This will particularly benefit the Indian exporters who operate under the ‘open account’ payment terms.

Also Read: Supply chain finance in auto sector bounced back smartly: Vayana

(Vinod Parmar is the Global Head – Sales and Marketing, Vayana Network.)

(Disclaimer: The views expressed in the article above are those of the authors’ and do not necessarily represent or reflect the views of Autofintechs.com. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.)

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