INVOICE DISCOUNTING :- ADDRESSING THE GREAT INDIAN CREDIT GAP

INVOICE DISCOUNTING :- ADDRESSING THE GREAT INDIAN CREDIT GAP

INTRODUCTION

For a very long time, Indian MSMEs have been considered to as the foundation of the nation’s economy. More than 11 crore people are employed by the country’s 6.3 crore micro, small, and medium-sized businesses, which also account for 48% of exports and over 30% of the nation’s gross domestic product. These numbers appear to confirm this claim. After the agriculture industry, MSMEs are now India’s second-largest employer.

The stats are stunning, however they do not accurately reflect the situation: MSMEs in India encounter a number of difficulties that have gotten worse during the last several years. Government-initiated initiatives to prevent tax evasion, boost compliance, or promote digital transformation all had a significant influence.

THE STORY OF THE CREDIT GAP

Therefore, the main issue is the lack of access to capital, which causes a cash shortage for the vast majority of these MSMEs. According to the National Institute of Rural Development and Panchayati Raj, this issue is so serious that 9 out of 10 MSMEs in India rely on unofficial sources of financing for their working capital needs.

For the majority of MSMEs, this cash crisis has created a very serious problem: the issue of survival. A staggering 45 lakh crores ($600 billion) is believed to be the total MSME credit demand in India, with this demand increasing significantly year over year.

What’s more concerning is the fact that without thorough paperwork, real collateral, and accurate financials, accessing funds from

THE OTHER SIDE

On the other side of this problem lie the cash-rich corporations, looking for increasing the returns on their treasury incomes. With interest rates remaining more or less stagnant over the past few years, it has become a challenge for corporations to sustain the return on their treasury incomes invested in bonds, FDs and other risk-averse assets.

These problems, faced by corporate buyers, also known as anchor companies, and their vendors can now be addressed with the onset of technology- Invoice Discounting- designed to enable buyers to earn a higher return on their treasury income (with a marked reduction in EBITDA), while vendors could readily get access to funds to optimise their working capital and address their liquidity woes.

THE DIGITAL PUSH FROM THE GOVERNMENT

With the Government-sponsored push towards digitisation, formalisation and transparency, the lending landscape has drastically changed, especially over the past 6 years. This started with the introduction of the Unified Payments Interface, popularly known as UPI, followed in close succession by the Government’s demonetisation efforts and the subsequent introduction of the Goods and Services Tax, better known as the GST.

What these initiatives essentially did was push Indian corporates and the entirety of their supply chains towards a more transparent, cashless and compliant financial system. The Goods and Services Tax regime reported a healthy 50% increase in indirect taxpayer base, on account of GST registrations, with more than 92 lakh Indian MSMEs now being GST registered.

THE TECHNOLOGY BEHIND IT ALL

When the formal sector of lending cannot cater to such a large portion of those who desperately need funds to survive, innovative, revolutionary new ideas are required to fill the vacuum that has crippled Indian MSMEs. Playing on their pervasive inability to access funds, FinTechs like Clear have leveraged technology to provide innovative solutions like Dynamic Discounting, substantially increasing their ability to fund their working capital requirements.

 

For as long as we can remember, businesses relied primarily on overdraft to finance their working capital requirements. This was because invoice discounting, without a technology-enabled discounting platform that provides a common ground for corporate buyers and their vendors to negotiate and arrive at a discounting rate, did not offer a practical solution to MSMEs. Older discounting models were, thus, marred by their inflexibility in providing discounts in a conducive, mutually beneficial manner. Traditional Discounting was primarily driven by vendor led sporadic requests for early payment as a last resort for funding their working capital needs.

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