Can the Rise of Supply Chain Financing Also Raise Rural India’s Economy?

In the early days of India’s independence, the focus was on rural development. The country’s first Prime Minister, Jawaharlal Nehru, envisioned a future for India in which its vast rural population would be lifted out of poverty and given access to modern amenities and opportunities.

However, in recent years there has been a shift from rural development towards an increased focus on urban areas. This is likely because more than two-thirds of India’s population now live in cities.

There are signs that this trend may be reversing as the government has begun to recognise the importance of developing rural areas. One sign of this change is the increasing use of supply chain financing to promote rural development. Let’s take a closer look at how this works.

Supply Chain Financing: A Brief Overview

The agriculture sector and Micro, Small and Medium Enterprises (MSMEs) are the backbones of the Indian economy. The former employs around 54% of India’s workforce and is responsible for 20% of the country’s GDP. Meanwhile, the latter comprises around 8 million enterprises contributing to approximately 30% of India’s GDP.

However, overall bank credit to agriculture and allied services is Rs. 12 trillion, accounting for only 12% of total bank credit. This is because the farming sector still mostly borrows from informal sources.

The sector faces many problems even after contributing significantly to the Indian economy. One of these is the lack of access to formal credit. This is where supply chain financing comes in. It is a type of financing that allows businesses to borrow money based on the value of their outstanding invoices. In other words, it is a way for companies to get paid sooner for the goods and services they have already provided.

Companies of all sizes can use this type of financing. Still, it is particularly useful for small businesses and farmers who may not have the same access to credit as larger businesses.

How is the world using SCF to develop rural areas?

With the pandemic, the importance of digital solutions that can help drive rural development has come into sharp focus. The pandemic has highlighted the need for more inclusive and efficient financing solutions to help small businesses and farmers weather various storms.

SCF has been widely used in developed countries for many years, but its potential for developing countries is only now being realised. According to BCR’s World Supply Chain Finance Report, SCF volumes reached USD 1.31 trillion in 2020, with the market expected to increase at a CAGR of 17.1%.

The supply side economies, such as the United States, Middle East, Europe, and APAC, have been the main drivers of this growth. However, there is a growing awareness of the potential for SCF to drive rural development in developing countries.

SCF penetration in India is much slower than in the rest of the world. The Indian SCF market is worth around Rs 60,000 crore, accounting for less than 5% of the total banking system’s outstanding assets. However, this is expected to change in the coming years. Agritech and government initiatives provide the much-needed impetus for farmers and small businesses to digitalise and go online.

How is supply chain financing fuelling rural development in India?

MSMEs have long had difficulty obtaining affordable and quick loans owing to the legacy structure of the Indian banking system, a lack of collateral, a lack of credit history, and other factors. This has been one of the main barriers to the growth of MSMEs in India.

Supply chain financing can help overcome some of these obstacles by providing funding based on the value of invoices rather than collateral. This helps MSMEs maintain adequate cash to meet their working capital demands consistently.

After obtaining financing, MSMEs can use the funds to grow operations, refill supplies, or purchase new raw materials. This can lead to increased production, employment, and tax revenue. All of these factors contribute to rural development.

Supply chain financing is also helping to boost agricultural productivity in India. Farmers often lack the working capital they need to purchase inputs such as seeds, fertilizers, and pesticides. This limits their ability to produce a good harvest and earn a profit. SCF can provide farmers with the funds they need to purchase inputs and increase production, leading to higher incomes.

What are some of the challenges of supply chain financing in India?

There is no doubt that SCF has great potential to drive rural development in India. However, some challenges must be addressed before it can reach its full potential.

1. Lack of awareness: One of the biggest challenges is the lack of awareness about SCF among MSMEs and farmers. Many are unaware of such financing options or how they can avail or benefit from them.
2. Lack of digital infrastructure: For SCF to work, businesses must digitalise their invoices and transactions. This requires a robust digital infrastructure, which is still lacking in many parts of India.
3. Lack of trust: The trust deficit is one of the main challenges in India. The mistrust between lenders and borrowers needs to be addressed for SCF to take off significantly.

What’s the way forward?

The potential for supply chain financing to drive rural development in India is enormous. The moment has come to encourage rural MSMEs to use digital SCF platforms and access supply chain financing to solve their working capital problems.

The government can create awareness and provide the necessary infrastructure. In addition, banks and financial institutions need to develop innovative financing methods tailored to the needs of rural MSMEs and farmers.

Lending institutions should also use software to assess the creditworthiness of MSMEs and farmers quickly and accurately. This will help reduce the risk of lending to small businesses and increase access to financing.

Finezza is one solution that streamlines the lending process, from managing customer KYC to assessing lending risks. Get in touch with us today to learn more about how we can help you!