SUPPLY CHAIN FINANCING AND MARKETS FOR AGRICULTURE AND ALLIED SECTOR

Broad Topics to Cover:

Supply Chain Finance (SCF) Overview

Supply Chain Finance (SCF) is a collection of processes that enhance cash flows, working capital
optimization, and payment terms within a supply chain. It allows buyers, suppliers, and financial
institutions to manage cash flows efficiently, thus ensuring the seamless execution of transactions.
SCF helps to strengthen buyers and suppliers relations, reduces financing expenses, and eliminates
the risks associated with non-payment or late payment.

1.1. Concept of Supply Chain Finance

According to the Global Supply Chain Finance Forum, SCF involves a “set of technology-based
solutions that best optimize working capital and provide business liquidity by financing receivables,
payables, and inventory.

In other words, SCF gives suppliers immediate payments while extending payment periods for
buyers, which is advantageous to both.

Benefits of Supply Chain Finance

SCF has developed into an essential financial technology for many enterprises in various sectors of
the economy. The importance of SCF stems primarily from its capacity to:

Increase Liquidity: Guarantees liquidity for both suppliers and customers.

Lower Cash Flow gaps: Provides an option to finance payables and receivables.

Improve Supply Chain Flexibility: Strengthens the nature of the buyer-supplier relationship.

Decrease Financial Expenses: Suppliers finance themselves at cheaper rates than conventional loans.

Minimize Payment Default Risk: Provides improved financial capacity to suppliers to avert disruptions
in the supply chains.

In McKinsey & Co.'s analysis, SCF has the capability of aiding working capital unlocking up to $2
trillion. This can aid companies in lessening their burdens and operate more efficiently.

3. Important Parts of Supply Chain Finance

SCF solutions can be broken down into three categories of working capital collection which include:

3.1. Financing Before Shipping

The funding raised before the delivery of goods, which covers the cost of the procurement and
production activities involved.

Raw Material Supply Agreement

3.2. Financing After Shipping

Funding after the goods have been shipped but before the buyer has made the payment.

Features Invoicing

3.3. Financing Payment Obligations

Supplier gets funded ahead of the invoice due date and the buyer can postpone the payment after
the due date but within an agreed time frame.

Example: Reverse Factoring/ Dynamic Discounting, Letters of Credit.

4. Working of Supply Chain Finance

SCF comprises three parties:

4.1. Parties Involved in SCF

Buyer (Corporate/Company): Who buys goods or services from the supplier.

Supplier (Vendor/SME): Who provides goods/services and expects payment for them.

Financial Institution (Bank/Fintech): Who offers credit to suppliers and buyers.

4.2. Process Flow of SCF

These are the steps that SCF processes typically follows:

The supplier sends the buyer goods and issues an invoice.

The buyer pays the invoice to an SCF or financing provider paying the invoice.

The SCF provider pays the supplier the portion of the invoice with a small discount.

Later the buyer pays the SCF provider the full amount of invoice on agreed terms.

This allows the supplier to be funded quickly and the buyer can postpone payment.

5. Financial Instruments Used in SCF

SCF can employ various financial instruments to improve cash flow:

5.1. Trade Credit

Buyers can yield suppliers on payments for a specified time

Short-term interest-free credit

5. Invoice Discounting

Suppliers give up unpaid invoices to the financials at a discount in order obscure the accelerated
payment.

5.3. Factoring

A third party (factor or bail factor) purchases sales receivables from suppliers and bills of consumers.

5.4 Reverse Factoring

A bank facilitates a supplier —finance— for the buyer.

5.5. Dynamic Discounting

Suppliers may supply early payment to Buyers who wish to pay for invoices in a discounted rate.

5.6. LC ( Letter of Credit )

On approval, the bank guarantees supplier payment if terms are met.

 1. Scope of Supply Chain Finance in India and Abroad

Scope of Supply Chain Finance in India

Growing Market Size

The Indian SCF market is witnessing significant growth, driven by increased demand from SMEs and
government support. A report by India Ratings & Research states that the Indian SCF market is
expected to reach INR 18 lakh crore (approximately $216 billion) by 2025, indicating massive
untapped potential.

2.2. Key Drivers of Growth in India

a. Government Initiatives

 The Reserve Bank of India (RBI) has encouraged the development of SCF by implementing
regulatory measures that facilitate invoice financing.

 The Trade Receivables Discounting System (TReDS), introduced by the RBI, has been
instrumental in digitizing invoice financing, allowing SMEs to access funds efficiently.

b. Rise of Digital Platforms

 Indian fintech firms like CredAble, Vayana Network, and RXIL are leveraging digital platforms
to streamline SCF operations, making them more accessible to SMEs.

 According to a 2023 NASSCOM report, the adoption of digital SCF solutions in India has
increased by 250% over the past five years.

c. SME Participation

 SMEs in India contribute nearly 30% of GDP, yet only 10% have access to formal credit
channels (India SME Forum, 2023).

 SCF provides SMEs with a lifeline by offering quicker access to working capital, reducing
dependency on high-interest loans.

d. Banking Sector Involvement

 Leading banks such as State Bank of India (SBI), ICICI Bank, and HDFC Bank have expanded
their SCF portfolios to include SME-focused financing solutions.

 According to SBI Research (2023), SCF accounts for 15% of total MSME lending in India, a
figure expected to rise due to digital transformation.

3. Scope of Supply Chain Finance Abroad

3.1. Market Trends and Growth

The global SCF market is undergoing rapid growth, with estimates suggesting a market value
exceeding $90 billion by 2030 (Allied Market Research, 2023). Key growth areas include North
America, Europe, and the Asia-Pacific region.
3.2. Factors Driving SCF Adoption Internationally

a. Digital Transformation and Fintech Innovations

 According to Deloitte’s 2023 Global SCF Survey, 70% of multinational corporations have
adopted AI-powered SCF solutions to automate trade finance and risk assessment.

 Blockchain-based SCF platforms have emerged, with companies like Marco Polo and
We.trade pioneering secure, real-time transaction processing.

b. Expansion of Cross-Border Trade

 The World Trade Organization (WTO) reports that international trade transactions rely on
SCF for approximately 80% of trade finance requirements.

 The EU's Digital Finance Strategy (2022) has actively promoted SCF as a key instrument to
bridge financial gaps in cross-border supply chains.

c. Role of Banks and Financial Institutions

 Leading banks, including HSBC, JPMorgan, and Citibank, have heavily invested in SCF
platforms.

 According to McKinsey (2023), banks that have incorporated AI-driven SCF solutions
reported a 25% increase in efficiency and a 40% reduction in default risk.

d. Sustainability and ESG Financing

 Companies are integrating Green SCF solutions to finance sustainable supply chains.

 The International Finance Corporation (IFC) estimates that sustainable SCF solutions could
unlock over $1 trillion in financing opportunities globally.

4. Challenges in SCF Adoption

While SCF offers significant benefits, challenges remain:

4.1. India-Specific Challenges

 Lack of Awareness: Many SMEs in India remain unaware of SCF solutions.

 Limited Digital Adoption: Rural businesses struggle with access to digital platforms.

 Regulatory Hurdles: Compliance with multiple regulations complicates SCF execution.

4.2. Global Challenges

 Geopolitical Uncertainty: Trade tensions between countries impact SCF adoption.

 Cybersecurity Risks: Digital SCF platforms are vulnerable to fraud and hacking.

 High Costs for SMEs: Smaller businesses often find SCF services expensive.

Ways in which solutions could be devised to make Supply Chain Finance easier.

The development of Supply Chain Finance (SCF) has been spurred on by technological change,
regulatory steps, and new financial structures. Various solutions have been created in order to
reduce the cost of SCF, make it more efficient, and more affordable to companies in industries. Some
of the most significant means through which solutions have been created to enable SCF are listed
below:

1. SCF Automation and Digitalization

Problem: Manual SCF processes were error-prone, paper-intensive, and time-consuming, causing
inefficiency in handling cash flow.

Solutions:

AI and Machine Learning (ML) Integration:

Platforms based on AI facilitate automating risk management and credit grading of

suppliers.Predictive analysis provides improved visibility for supply chains, decreasing finance risk.

Example: JPMorgan applied AI to its SCF platform and executed it with a 30% decrease in time
(McKinsey, 2023).

2. Robotic Process Automation (RPA):

Decreases processing and invoice reconciliations, minimizing labor and errors.Example: Citibank's
SCF system with RPA shortened invoice approval time from weeks to hours.

Cloud-Based SCF Platforms: Centralized data access and storage boost collaboration among financiers
and suppliers.Example: SAP Ariba provides a cloud-based SCF solution that simplifies financing
processes.Blockchain for Secure and Transparent SCF TransactionsProblem: Trade financing has been
affected by fraud, delays, and non-transparency.

Solutions:

Smart Contracts: Blockchain-based smart contracts allow trustless, mediator-less, real-time

transactions.Example: Blockchain supply chain finance platform Marco Polo Network has brought
financing approval down to a few days from weeks.

Real-Time Monitoring of Transactions: Makes total payments transparency, reducing fraud and
dispute risk to a minimum.Example: IBM's We.trade platform monitors end-to-end SCF on
blockchain.

Cross-Border SCF Enablement: Blockchain does away with the dependency on traditional banks for
cross-border SCF transactions.Example: HSBC enabled the world's first cross-border blockchain-based
SCF transaction, reducing trade transaction time by 40%.

3. Fintech and Embedded Finance Solutions

Problem: SCF may not be easily accessed by SMEs due to stringent banking conditions.

Solutions:

Fintech Lending Platforms: Fintech firms and NBFCs provide alternative SCF solutions to
SMEs.Example: Indian fintech firm CredAble provides instant working capital solutions to SMEs.

Buy Now, Pay Later (BNPL) for SCF: The suppliers are immediately paid, and the buyers get long credit
terms.

For instance, Afterpay and Klarna introduced BNPL products for B2B SCF transactions.

Supply Chain Finance-as-a-Service (SCFaaS):

 o SaaS-based SCF platforms provide scalable and flexible financing solutions.

o Example: Taulia’s SCFaaS platform helps corporates optimize their cash flow without upfront
costs.

4. Government and Regulatory Support for SCF

Problem: Lack of standardized SCF regulations has hindered its adoption, especially among SMEs.

Solutions:

 Regulatory Frameworks for SCF:

o The Reserve Bank of India (RBI) launched Trade Receivables Discounting System
(TReDS) to promote digital invoice financing.

o The EU’s Digital Finance Strategy supports SCF adoption among European
businesses.

 Public-Private Partnerships (PPP) for SCF:

o Governments collaborate with banks and fintech firms to provide SCF access to
SMEs.

o Example: The UK government partnered with Lloyds Bank to launch SCF schemes
for small suppliers.

 Export Credit Agencies (ECAs) Supporting SCF:

o Governments back SCF solutions for exporters through ECAs.

o Example: EXIM Bank of India offers supply chain financing for exporters at
competitive rates.

5. Integration of ESG and Sustainable Supply Chain Finance (SSCF)

Problem: Traditional SCF models do not account for sustainability, making it difficult for companies to
align with ESG goals.

Solutions:

 Green SCF Programs:

o Companies prioritize financing for suppliers with sustainable practices.

o Example: Unilever provides lower interest rates to suppliers with strong ESG
compliance.

 Carbon Footprint-Based Financing:

o Lenders offer preferential SCF terms to companies with lower carbon emissions.

o Example: HSBC’s Sustainable Supply Chain Financing program supports businesses

that meet sustainability benchmarks.

 ESG-Linked Dynamic Discounting:

 o Suppliers with high ESG scores receive early payment incentives.

o Example: Deutsche Bank launched an ESG-linked SCF program to encourage ethical

sourcing.

6. AI-Driven Risk Assessment and Fraud Prevention

Problem: SCF fraud, including fake invoices and double financing, has been a major concern.

Solutions:

 AI-Powered Fraud Detection:

o Machine learning algorithms analyze transactional patterns to identify anomalies.

o Example: Barclays’ AI-powered SCF system detected 30% more fraudulent invoices
than traditional methods.

 Real-Time Credit Scoring for Suppliers:

o AI-based tools assess supplier creditworthiness based on real-time financial data.

o Example: JPMorgan uses alternative data (e.g., payment history, business ratings)
for supplier risk assessment.

 Biometric Authentication for SCF Transactions:

o Fingerprint and facial recognition secure SCF transactions.

o Example: Mastercard introduced biometric verification for SCF payments to prevent

fraud.

3. Financial Instruments Used in Supply Chain Finance (SCF)

Supply Chain Finance (SCF) involves a range of financial instruments that optimize working capital,
improve cash flow, and enhance efficiency for both buyers and suppliers. These instruments provide
funding solutions at different stages of the supply chain, from procurement to payment. Below are
the key financial instruments used in SCF:

1. Trade Credit

Definition:

Trade credit is an arrangement where suppliers allow buyers to defer payment for goods and services
for a specified period (e.g., 30, 60, or 90 days).

How It Works:

 The supplier delivers goods to the buyer with an agreement to receive payment at a later
date.

 No interest is usually charged if payments are made within the agreed credit period.
  Helps buyers maintain liquidity while suppliers secure sales.

Example:

A manufacturer supplies raw materials to a retailer and offers 90-day payment terms, allowing the
retailer to generate revenue before making the payment.

2. Invoice Discounting

Definition:

Invoice discounting allows businesses to use unpaid invoices as collateral to obtain short-term
financing from financial institutions.

How It Works:

 A company sells its outstanding invoices to a lender at a discount.

 The company receives an advance (typically 80-90% of the invoice value).

 Once the buyer pays, the lender deducts fees and transfers the remaining balance.

Example:

A supplier with $100,000 in invoices sells them to a lender at a 2% discount, receiving $98,000
immediately instead of waiting for the buyer's payment.

3. Reverse Factoring (Approved Payables Financing)

Definition:

Reverse factoring is a financing arrangement where a buyer’s bank or a third party pays suppliers
early at a discounted rate, based on the buyer’s creditworthiness.

How It Works:

 A large buyer partners with a financial institution to offer early payments to its suppliers.

 The supplier receives an advance payment at a lower financing cost.

 The buyer extends its payment terms without harming the supplier’s cash flow.

Example:

A multinational retailer partners with a bank to pay its suppliers within 10 days instead of the usual
60 days. The bank pays the suppliers early, and the retailer repays the bank later.

4. Factoring (Receivables Purchase)

Definition:

Factoring involves selling accounts receivable (invoices) to a third-party financier (factor) at a

discount to receive immediate cash.

How It Works:

 A business sells its invoices to a factoring company.

 The factoring company provides 80-95% of the invoice value upfront.

  Once the buyer pays, the factoring company deducts fees and pays the remaining amount to
the seller.

Example:

A small business sells $50,000 worth of invoices to a factoring company, which advances $45,000
immediately. When the buyers pay, the factor deducts a 2% fee and transfers the remaining amount.

5. Dynamic Discounting

Definition:

Dynamic discounting allows buyers to pay suppliers early in exchange for a discount on the invoice
amount.

How It Works:

 A buyer offers to pay a supplier before the due date in exchange for a variable discount.

 The discount amount decreases as the payment date moves closer to the due date.

Example:

An invoice of $100,000 is due in 60 days, but the buyer offers to pay:

 In 10 days at a 2% discount (supplier receives $98,000).

 In 30 days at a 1% discount (supplier receives $99,000).

6. Letter of Credit (LC)

Definition:

A Letter of Credit (LC) is a financial instrument issued by a bank guaranteeing payment to a supplier
upon fulfillment of agreed-upon conditions.

How It Works:

 The buyer’s bank issues an LC in favor of the supplier.

 The supplier ships the goods and submits documentation to the bank.

 If all conditions are met, the bank releases payment.

Example:

An exporter in China receives an LC from a US importer’s bank, ensuring payment upon shipment
and documentation verification.

7. Bank Guarantees

Definition:

A Bank Guarantee is a promise by a bank to cover a buyer’s payment obligation if they fail to pay the
supplier.

How It Works:

 The supplier requests a guarantee from the buyer’s bank.

  If the buyer defaults, the bank pays the supplier.

Example:

A contractor receives a performance guarantee ensuring that payments will be made even if the
buyer fails to meet obligations.

8. Asset-Based Lending (ABL)

Definition:

Asset-Based Lending involves using inventory, accounts receivable, or other assets as collateral to
obtain financing.

How It Works:

 A business secures a loan based on the value of its assets.

 Lenders provide funding up to 70-90% of the asset value.

 Common in capital-intensive industries.

Example:

A manufacturer secures a $5 million loan using its inventory and equipment as collateral.

9. Inventory Financing

Definition:

Inventory financing allows businesses to use unsold inventory as collateral to secure a loan.

How It Works:

 A business pledges inventory to receive working capital.

 The loan is repaid as inventory is sold.

Example:

A retailer secures a $200,000 loan against seasonal inventory to stock up before the holiday season.

10. Pre-Shipment and Post-Shipment Financing

Definition:

These financing instruments help businesses manage cash flow before and after shipping goods.

Pre-Shipment Finance:

 Funds provided to suppliers before goods are produced and shipped.

 Used for raw material procurement and production costs.

Post-Shipment Finance:

 Financing received after goods are shipped, but before payment is received.

 Helps exporters bridge the working capital gap.

Example:
An Indian textile exporter receives pre-shipment finance to purchase cotton and post-shipment
finance while waiting for overseas payment.

11. Trade Receivables Discounting System (TReDS) (India-Specific)

Definition:

TReDS is an electronic platform regulated by the Reserve Bank of India (RBI) that enables MSMEs to
discount their invoices.

How It Works:

 MSMEs upload invoices on TReDS.

 Banks and financiers bid to offer early payments at competitive rates.

 MSMEs receive funds without waiting for buyer payments.

Example:

An Indian SME sells an invoice worth ₹1,00,000 on TReDS. A bank offers ₹95,000 upfront, with the
balance settled upon buyer payment.

4. List and classify the organizations that work on Supply Chain Finance.

Supply Chain Finance (SCF) encompasses a diverse array of organizations that facilitate optimized
working capital and improved cash flow between buyers and suppliers. These entities can be
broadly categorized into Financial Institutions, FinTech Companies, and Platform Providers. Below
is a classification of notable organizations within each category:

1. Financial Institutions

Traditional banks and financial institutions have developed SCF solutions to support their
corporate clients.

 Bank of America: Offers comprehensive SCF resources and tools to help businesses
optimize their supply chains.
business.bofa.com

 J.P. Morgan: Provides market-leading SCF solutions designed to meet working capital, risk
mitigation, and cash flow objectives.
jpmorgan.com

 Citi: Recognized as a top SCF provider, Citi offers global programs supporting numerous
buyers and suppliers.
gfmag.com

 HSBC: Delivers SCF services that enhance supplier relationships and optimize working
capital.

 Standard Chartered: Offers tailored SCF solutions to meet the diverse needs of businesses
across regions.
2. FinTech Companies

Innovative FinTech firms have introduced technology-driven SCF solutions, enhancing accessibility
and efficiency.

 Taulia: Provides AI-based electronic invoicing and supply chain management solutions,
including dynamic discounting and cash forecasting.
tracxn.com

 Kyriba: Offers cloud-based treasury automation and risk management, with a suite of cash
and liquidity solutions.
tracxn.com

 C2FO: Operates an on-demand working capital platform, facilitating flexible access to low-
cost capital for businesses worldwide.
prove.com

 CredAble: A working capital tech platform in India, providing scalable products and
financing solutions for businesses of all sizes.
ibsintelligence.com

 Vayana Network: An electronic network connecting corporations and their supply chains to
financial institutions for easy and low-cost trade financing.
ibsintelligence.com

3. Platform Providers

These organizations offer digital platforms that connect various stakeholders in the supply chain,
facilitating seamless financial transactions.

 Tradeshift: A cloud-based business network and platform for purchase-to-pay automation,

supply chain payments, and financing.
en.wikipedia.org

 GT Nexus: Provides a cloud-based platform used by importers, exporters, and financial

institutions to manage global trade, including SCF.
en.wikipedia.org

 Orbian: Specializes in multibank funding, offering comprehensive SCF solutions and

services to large corporate clients globally.
gfmag.com

 PrimeRevenue: Delivers cloud-based SCF programs designed to unlock working capital and
provide dynamic discounting solutions.
prove.com

 Demica: Offers innovative SCF solutions enabling clients to extend payment terms and help
suppliers secure funding at lower costs.
prove.com

MARKETS FOR AGRICULTURE AND ALLIED SECTORS

India's agri and allied sectors are undergoing considerable changes, which are being brought about
by technological upgradation in cold chain infrastructure, the arrival of the Open Network for Digital
Commerce (ONDC), and the growth in warehousing capacities. These are opening up new avenues
and resolving age-old issues in the value chain of agriculture.

1. Cold Chain Infrastructure

Cold chain infrastructure describes temperature-controlled transportation and storage systems that
are critical for maintaining perishable agricultural commodities. In India, the insufficient availability
of cold chain facilities has traditionally resulted in high post-harvest losses.

Market Growth

Current Status: The Indian cold chain market was worth around INR 2,287.5 billion as of 2024.

Projected Growth: The market will grow to INR 6,061.7 billion by 2033 at a Compound Annual
Growth Rate (CAGR) of 10.86% between 2025-2033.

imarcgroup.com

Key Drivers

 Organized Food Retail Expansion: The growth of organized retail has increased the demand
for fresh produce, dairy, and meat products, necessitating robust cold chain solutions.

 Processed Food Industry Growth: Rising consumer demand for processed foods has spurred
investments in cold storage and transportation.

 Government Initiatives: Policies like the Pradhan Mantri Kisan SAMPADA Yojana aim to
develop mega food parks and integrated cold chain facilities, enhancing infrastructure.
globenewswire.com

Challenges

 Infrastructure Gaps: Despite progress, significant disparities exist, with certain regions
lacking sufficient cold storage capacity.

 High Operational Costs: The expenses associated with establishing and maintaining cold
chain facilities can be prohibitive, especially for small-scale operators.

2. Open Network for Digital Commerce (ONDC)

Launched in April 2022 by the Department for Promotion of Industry and Internal Trade (DPIIT),
ONDC aims to democratize digital commerce by creating an open, inclusive network. This initiative
holds particular promise for the agricultural sector.
Impact on Agriculture

 Market Access for Farmers: ONDC enables Farmer Producer Organizations (FPOs) and
individual farmers to reach a broader customer base, facilitating better price realization.
www2.deloitte.com

 Integration of Services: The platform offers various services, including soil testing,
warehousing, equipment hiring, and financial services, streamlining operations for
agricultural stakeholders.
ondc.org

Recent Developments

 FarMart's Participation: In September 2023, FarMart became the first food and agri-tech
company to launch its products on ONDC, enhancing access to quality ingredients for food
manufacturing businesses.
agrospectrumindia.com

 Farmer Group Engagement: Over 7,000 farmer collectives across various states are now
selling unique agricultural products on the ONDC platform, expanding their market reach.
financialexpress.com

3. Warehousing Opportunities

Efficient warehousing is critical for reducing post-harvest losses and ensuring the timely delivery of
agricultural products.
Current Landscape

 Existing Capacity: India's warehousing sector is expanding, with significant contributions

from both public and private entities.

 Key Players:

o Central Warehousing Corporation (CWC): A government entity operating numerous

warehouses nationwide, providing logistics support to the agricultural sector.
en.wikipedia.org

o Sohan Lal Commodity Management: An Indian post-harvest agri-logistics service

provider offering warehousing, procurement, and collateral management services.
en.wikipedia.org

o StarAgri: Provides integrated agri-tech solutions, including warehousing and

collateral management, supporting the agricultural value chain.
en.wikipedia.org

Emerging Opportunities

 Technological Integration: Adoption of technologies like IoT and blockchain is enhancing

warehouse management systems, improving efficiency and transparency.

 Public-Private Partnerships (PPPs): Collaborations between government bodies and private

firms are leading to the development of modern warehousing facilities, addressing
infrastructure deficits.