This article originally appeared on CNBC: here.
Role of supply chain trade finance in the growth of Indian economy
- India has huge opportunities ahead as it continues to industrialize and commercialize its economy.
- With significant natural and labour resources available, we should all be confident that Indian economic growth will continue at a pace, especially as other economies in Asia become increasingly mature.
India has huge opportunities ahead as it continues to industrialize and commercialize its economy. With significant natural and labour resources available, we should all be confident that Indian economic growth will continue at a pace, especially as other economies in Asia become increasingly mature. But success requires the right conditions, and Indian companies have had to deal with significant administrative and other hurdles as they modernise and develop.
Supply chain trade finance is vital innovation for Indian companies, reducing the financial cost of importing goods significantly and leading directly to greater agility in supply chains.
As it is widely recognised, international supply chains can be a headache for Indian companies. Indian companies are often not seen as being good credits – although many Indian companies are significantly stronger than their suppliers. The Indian legal system has often been viewed with suspicion from outside – and then administrative procedures can be lengthy and burdensome, particularly the regulations around banking, foreign exchange, compliance, and customs.
Whilst it might seem counter-intuitive to talk about imports in the context of Indian growth, imports are very important. Whilst India does have fabulous resources, many important materials and components must be brought into the country. Indian manufacturing is the engine of its recent growth and the growth to come in the next decade or two. Ensuring that there are solid and reliable international supply chains is vital – and these need to be efficient.
India’s star is rising. Recent changes to the laws around creditor protections are already helping, and the credibility of Indian companies internationally improves each year. Moreover, the Make in India initiative is certainly boosting local production capabilities, although international supply chains remain very important. So, the trends are going in the right direction – but many large and great Indian importers are still having to rely upon the out-dated and expensive letter of credit. Supply chain trade finance solves this problem at a stroke.
The letter of credit (“LC”) is expensive – often 3 or 4 percent on the landed costs of goods. It is time-consuming, often taking up many days of effort to process and handle, with many pitfalls and traps for the unwary or inexpert customer. On top of that, many suppliers would rather not use it – yet most Indian companies are still required to provide LCs because of a lack of trust in the payment.
The costs of the LC process end up in the street prices for the goods that we all purchase – and in the prices of exports that result from our efforts. Finding a new way to handle imports without LC is imperative.
Supply chain trade finance (“SCTF”) is the solution that importing India has been looking for. It does away with the LC process and provides a simple way for Indian importers to take control over how their international suppliers are funded and paid. Indian importers, their local Indian banks and their international suppliers are connected directly together over a platform. The platform enables the parties to work together in real time. Over the platform, suppliers can be paid upfront at shipment, whilst importers can take low-cost credit terms from the local bank. Typical cost savings are 1-2 percent on the landed goods, and trades are organised same day instead of over a week or more via the legacy LC route.
Financial inefficiency is one of the biggest costs that can be managed out of Indian supply chains. Reducing the cost of funding and paying suppliers translates directly into lower street prices and more competitive exports.
Whilst 2 percent might not sound like much, this is a saving of $2m each year for a company that imports $100m in goods – and this is the kind of impact that SCTF can have.
And the necessary conditions for the success of SCTF are now emerging. There is a growing realization amongst larger corporates and their bankers that existing practices really should change.
India and the world economy are starting to recover from the impact of the pandemic. Many Asian supply chains have been subject to significant liquidity issues as economies have been disrupted and bank balance sheets in their local markets have come under pressure. Indian corporates, supported by the banks, who find a way to get cash upfront to their suppliers at shipment can negotiate much better prices and obtain significant loyalty from their suppliers in these tough markets. This is the way to go and the early signs are that the take up of the new platform is going to be strong.
In the end, though, supply chain trade finance is just one component of the many that are required to come right for India to hit the demanding growth targets that it has set for itself. But with coordination, hard work and traditional Indian entrepreneurial spirit, India will thrive – and supply chain trade finance can be an important part of that success.
The author, Tim Nicolle, is Founder and CEO at PrimaDollar. The views expressed are personal.
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