Banks pushing for supply chain finance on back of low SME bad loans

Negligible non-performing assets in the segment is a driving factor for banks

Banks are increasingly pushing for supply chain finance (SCF) due to its lower delinquency rates and easy disbursals. These include Bank of Baroda, Axis Bank and YES Bank. 

The SCF provides banks with greater opportunity for leveraging cross-selling and data analytics. “SCF is a win-win opportunity for all stakeholders in the supply chain ecosystem — the corporates, their suppliers and dealers," said J P Singh, head, small and micro enterprises (SME), Axis Bank. It links small vendors to the large corporates. This enables SMEs to access credit at a lower cost with minimal documentation and lesser collateral. 

Negligible non-performing asset (NPAs) in the segment is a driving factor for banks, which they attribute to the inherent structure of the SCF.  Bank of Baroda claims to have zero NPAs in this segment. “In the past one and a half year since we started this business, we have sanctioned over Rs 10 billion and have around 25 anchors,” said Lithesh Majethia, head, SCF, Bank of Baroda. Axis Bank's SCF arm has seen a steady compound annual growth rate of 26 per cent since the past three years. 

The corporate linkages serve as an assurance, said experts. “Any default in repayment results in stop supply invocation by the large corporates, which can jeopardise the business' existence. This acts as a deterrent for borrowers,” said Singh. According to YES Bank, corporate anchors also help banks in the delinquency management and keep NPAs low. 

SCF solves a lot of problems associated with lending to the SMEs. A key challenge is the lack of data when it comes to new to banking (NTB) customers. "The challenge in SME lending is to reach and identify them and veracity of financial data of the borrower. This gets mitigated to a large extent in SCF by generating credit comfort from borrower's transactional behaviour with large corporate," said Sumit Gupta, group president and head, SME Banking, YES Bank. The bank has seen continuous on-boarding of NTB clients. This is reflected in clients’ contribution of over 50 per cent in incremental supply chain MSME book in FY18, said Gupta.

While the quantum of data helps banks to strengthen existing customer’s profile, it is also leveraged to expand their network.

“SCF digitally captures the purchases and sales data along with repayment history which can be mined for taking lending decisions. The implementation of initiatives like Goods and ServicesTax, E-Way bill etc., along with the borrowers’ data being captured through SCF can be used very effectively to build models to undertake digital lending,” said Singh.

Bank of Baroda’s Majethia said that SCF captures data across the value chain, which serves as a great platform to drive cross selling of other retail products to both the small merchants and the large corporates.  

Banking experts said that they are seeing increasing demand for SCF from both corporates and SMEs and foresee a higher growth rate for the segment going forward.