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The successive waves of coronavirus pandemic that swept over India had hit the Micro, Small and Medium Enterprises (MSME) segment the hardest, forcing many to shut down operations or lay off their employees. Cash flow problems were compounded by disrupted global supply chains. "MSMEs faced the twin challenges of high raw material prices and financial stress. Prices of metals and plastic raw material increased by 40 to 50 per cent over the last year, making it difficult for most of them to fulfil prior commitments and squeezing their cash flows,” Mohan Suresh, the chairman of Federation of Indian Micro and Small and Medium Enterprises (MSMEs), had told THE WEEK in March.
What the pandemic triggered was a tectonic shift, says Manish Kumar, co-founder and CEO of KredX, one of the largest supply chain financing platforms (SCF) in India. "Businesses had no option but to go digital. Whether you ran a kirana store or a large company, you needed to be digital. And that is where we came in," he said.
So, what is SCF, and what does KredX do? You can think of supply chain financing as a way for buyers, sellers and different participants in the supply chain to get access to quick, low-cost, efficient financing that will help optimise their cash flows and maintain good working capital. One simple example would be your run-of-the-mill invoice discounting. If a supplier doesn’t wish to wait for weeks for a customer to pay (in already delayed pandemic invoicing cycles), the supplier can sell off the unpaid invoices to platforms like KredX at a discounted price, and can thus avail financing in a matter of days.
KredX, now seven years old, started off as a simple invoice discounting platform or exchange, and has since evolved. It touches every aspect of the supply chain, from vendor-supplier side on the upstream, and the dealer-distributor-retailer side on the downstream. They also have provisions for import-export on the cross-border trade side, and have expanded into tech solutions and B2B payments.
During the pandemic—more specifically, during the first lockdown—several MSMEs fell into the trap of knee-jerk reactions, says Kumar. “People did not know what was going to happen, and everybody wanted to sit on cash,” he said. “[A company would] stop doing vendor payments, and, at the same time, collect as much cash from buyers as possible. This created a situation where everybody was trying to hoard cash, and nobody was willing to float the cash into the system. This happened because nobody had any idea what the world was going to look like.”
In conversation with THE WEEK, Kumar speaks about technologies like Artificial Intelligence (AI) and Machine Learning (ML) providing pre-shipment finance solutions (always higher risk) in addition to post-shipment, and whether or not there should be more focus on providing growth capital (for expansion and growth) along with working capital (for payroll, operations and so on).
Q. What solutions did KredX provide to a lot of these MSMEs under stress?
KredX provided a checkout experience with literally less than 100 seconds for onboarding and disbursal. We provide solutions on both the financial and the tech sides. We make sure that cash outflow and cash inflow are scheduled in a way that working capital issues do not arise. We also help them collect money faster from suppliers, from dealer-distributors or buyers, and get the best rate from the vendors. On top of that, we give them predictions based on how the cash inflow is going to change, or cash outflow is going to change, and what kind of action they can take to ensure minimisation of cash flow mismatch.
Q. Is that where KredX's BNPL solution comes in?
So, BNPL is a digital SCF solution for dealer, distributor and retailer side. What we realised is that a pay later solution is available on consumer side, but the need was much higher on the dealer-distributor side. The reason is because the dealer-distributor is not a consumer of products. So, they have to create an inventory, and there will be an inventory churn-out problem [which means it will take some time to sell the inventory]. That creates working capital issues. So, we decided to give them a kind of checkout experience, and create an embedded product which connects to a dealer/retailer management system, it can work in B2B marketplaces, or it can be on standalone offline basis. Any business that comes in gets access to a web page or an app, where they will perform a one-minute onboarding process, and we will tell them that they are approved for [a set amount of] line of credit. What we expect is that any brands utilising the BNPL feature can increase their sales by 2x.
Q. Was there friction while the MSMEs tried to digitise and adapt during the pandemic?
Not really. After the first lockdown, they had no choice. Those who went digital were doing good, and those who did not struggled. We saw an example with ecommerce. Flipkart and Amazon started doing many times the volume that they did pre-pandemic. We also saw that physical chain stores were hurting the most. A lot of clients told us that they were doing half their sales on Flipkart and Amazon. Now, add your Jios and Tatas to the mix, and at least two-thirds of the sales were happening digitally. So, having a digital footprint was not a choice. The only question was how late you were in adoption.
Q. There is an argument that supply chains will become much more localised post-pandemic. Do you agree with this? And, will this impact SCF?
Fundamentally, [over the past couple of pandemic years] there was a lot of churn. There was the pandemic, shifting sentiments on China, and the Ukraine-Russia war. Some sectors of supply chain got impacted, primarily on the chip and the silicon sides. Now, a lot of larger companies are trying to hedge their risks. It is not just localisation, but finding alternative centres of manufacturing; India can benefit immensely from this. On the domestic front, though, there are pockets where the supply chain is still disrupted because the raw material availability is dependent on imports. [Now] let us go a little bit deeper into the SCF side. One fundamental change is on the freight transport side. The demand for container ships has increased, and that leads to companies owning the containers [and freight transport systems] to ask for cash-and-carry mode, which creates a scenario wherein the suppliers have to pay everybody in advance in the entire ecosystem. If they were earlier paying in 30 to 90 days, now everything happens upfront. This makes the role of SCF more important. There are other drastic changes too. We recently published a report on how B2B payments pre- and post-pandemic have shifted in different sectors. For example, in ecommerce, the payment credit period has moved from 45 days to 40 days. In certain sectors like offline payments, it has gone from 90 days to 180 days. Similarly, in the automobile sector, those supplying the raw materials are asking for early payments. These are sector-specific problems, but, fundamentally, a supply-demand constraint is showing up.
Q. As you mentioned, there is a lot of unpredictability currently. What could be the role of technologies like Artificial Intelligence and Machine Learning in predicting a lot of these upheavals, and maybe even supply chain financing to focus a bit more on pre-shipment funding [in addition to the normal post-shipment]?
Absolutely. [For financiers], the actual demand is on the pre-shipment side. The difference still exists because post-shipment funding is low-risk compared to pre-shipment. Take an example. In China, some suppliers were asking for advance payment before shipment. They have like 20 different buyers standing at their door, and they say they will prioritise whoever can pay in cash. A lot of [such] pre-shipment financing needs is coming up. What we need to see is how, with the use of technology and AI and ML, you can predict the pre-shipment to post-shipment part more accurately and try to take the execution risk out of the vendor; in case of export-import, even take risks related to customs and shipping out of [the equation]. There is a huge need that will arise in pre-shipment financing, and there could be innovative solutions on how to merge pre-shipment and post-shipment funding. It could also be that pre-shipment financing goes at a different rate compared to post-shipment.
Q. Supply chain financing is currently focused on a lot of working capital issues. Should there also be a pivot to growth capital?
I think SCF is [focused] more around the working capital side. In a way it solves the problem of growth capital too in [supply chain-heavy] industries like manufacturing. In case of new age tech companies, or companies doing a lot of marketing, that is where the working capital of SCF is not sufficient, and growth capital is required.
Q. Banks have certainly been loath to enter headfirst into this space. Do you think they should adapt, or is kind of a different space where other players are required?
I don't think it is a huge ask for banks to change. It is just a mental block. Today, if you go to a bank, the bank will say say let us own this customer end-to-end. This means a current account, a salary account, a credit card, and everything else. Even if bank product is not the best choice for the customer, they will just keep bombarding you with it. That is where the wallet share concept [referring to the customer's expenditure on the brand] comes in. Rather, I think a different concept is evolving. Even if I am sitting on, say, 10 per cent wallet share of a customer, can I have 90 per cent of the customer with me? This is in contrast to having 90 per cent of the wallet share, and just 10 per cent of the customer with me. This concept is very much warming up on the consumer side. Take an example. On the payment side, say, 90 per cent of transactions happen via Google Pay and Phone Pe. The banks don't own the customer. The customers are still owned by Google Pay and Phone Pe; but, the rails are still banking rails. They [Google Pay and Phone Pe] still use UPI. Similarly, in SCF also, the platform of exchange will own the entire customer onboarding experience. Banks connects to platform like KredX, and they do their financing PSL [priority sector lending] requirements, but the customer ownership is still not with them. At the same time, the platform knows they are only owning the customer for supply chain financing, and they will not unnecessarily try to sell them a current account or salary account or something like that.
Q. The blockchain technology is now making its way into supply chains. How does KredX evaluate the future of distributed ledgers in SCF?
Blockchain as a technology is amazing. But, the problem, again, is the control part of it. When organisations try to control something, then it is no longer required to be on blockchain. If I always say that everything goes through me personally, then I become a central authority and I don't need a blockchain or a distributed ledger to work on. I think where we can find a use-case for blockchain is on the export side. Numerous parties are involved on the export side. Somebody has to ship it, then it has to be sent via domestic transport to the nearest port, then there is a freight transport and customs. A lot of parties are involved in different phases. That is where I think blockchain use is a no-brainer. The validity of the contract, the validity of shipment—all of these issues get eliminated. I [an export financier] can just look at the contract and say, I know who is going to do what. At any given time, we know where the shipment will be, and what the value-add is. So, it becomes very easy for me to finance.