Banks push supply chain finance on back of low SME bad loans

Certain banks, such as Bank of Baroda, Axis Bank and YES Bank, are increasingly pushing for supply chain finance (SCF) due to lower delinquency rates and easy disbursals.

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 ~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 to keep NPAs low. SCF solves a lot of problems associated with lending to 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 determine the 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.