Supply Chain Finance, a new concept in Working Capital Financing, uses the synergies prevailing in a supply chain to ease the flow of goods by financing the working capital of a major OEM. This concept is gaining ground as more and more banks and borrowers are joining hands.
Banks have provided Working Capital Finance (WCF) services to companies for a long time now. However, while providing finance for its day-to-day activities to an organization, banks usually looked at the particular entity (supplier or an original equipment manufacturer) in isolation, which provided a very narrow view of the company’s creditworthiness. But a new innovation in the field of WCF is all set to change this scenario. Supply Chain Financing (SCF), an advanced version of WCF has become very popular with both banks as well as customers because of the convenience it offers to a major manufacturer as well as its suppliers and distributors and also the banks themselves. In SCF, banks finance the suppliers and distributors of major Original Equipment Manufacturers (OEMs), i.e., the value chain starting from the supplier to an OEM and ending with the distributor, thus, ensuring a smooth flow of material in the value chain. Shyamji Mehrotra, Deputy General Manager, Allahabad Bank agrees, “SCF is an innovative finance mechanism by which bank meet the various funds requirements of suppliers/distributors, thus helping their seamless cash flow meet their working capital needs. It is a more advanced and sophisticated version of the age-old working capital financing. It covers the entire gamut of financing both the suppliers and vendors side.” He further adds, “Under SCF the suppliers/distributors can leverage on the relationship with corporate houses in sourcing low-cost credit with support from his counterparts. For banks, it is an easy way of deployment of credit with very low risk and almost 100% assured payment.”
The benefits of SCF, however, are limited to those suppliers/distributors that are associated with major OEMs and only those banks with a high level of IT integration can afford to provide this service. This means that smaller banks still have a long way to go before they too begin financing the value chain. Nevertheless, the concept seems to have a bright future. |
