Vayana Network was started with a vision to democratise access to trade finance to the smallest of enterprises. It designs tailor-made, affordable, closed-loop programmes to meet financing demands of businesses and their supply chain partners. Vinod Parmar, global head of sales & marketing, speaks to Subir Ghosh about financing for MSMEs in the textiles and apparel industry.
Q. The backbone of the textiles and apparel industry, in many ways, are the countless MSMEs that are part of the supply chain. How and where exactly does a fintech company figure in this chain?
- A. MSMEs are a huge contributor to the textiles and apparel industry as is the case with the overall Indian economy. This is evident in cities like Tiruppur, Coimbatore and Ludhiana which are big textile industry hubs. Their overall trade cycle indicates that the MSMEs take between 90 and 120 days to meet their typical buy-make-sell cycles. A lot of time and investment are spent in buying raw materials, processing them and creating the end goods that are sold to buyers, some of them unorganised. Then begins the long, painful wait (anywhere between 90 and 120 days) for the MSME to finally realise the value of goods sold. In effect it takes 180-250 days for an MSME to get the working capital that they can infuse back into the business and meet growing customer demands. A fintech company can give easy, low-cost access to short-term trade finance against confirmed trade. Buyers and sellers can collaborate on a network by simply sharing their trade documents and giving confirmations against the actual trade through a single click. At the backend, one can work with lending partners and through a simple, programmatic approach to bring convenient and fair price access to finance for these MSMEs.
Q. MSMEs in the textiles-apparel sector are unorganised by their very nature. How can a fintech company help them?
- A. MSMEs in general tend to be unorganised. This is especially the case in the textiles and apparel sector given the number of small players doing contractual activity, job works and other smaller assignments. Lack of financial documentation, poor quality data that can’t be relied upon, lack of security in the form of assets, infrastructure or property that they can offer make it challenging for traditional lenders like banks and NBFCs to finance this segment. Fintechs are increasingly addressing this gap by relying on non-traditional data that includes looking at the quality of business the MSMEs do with their buyers, their purchase data, GST returns, bank statements, and individual promoter backgrounds. These proxy data inputs help fintechs determine the strength and regularity of the business; and use these parameters as a primary tool to create working capital possibilities for them. While MSMEs have to still rely on traditional lenders to finance their equipment or term loans where a lot more due diligence is required, their short-term working capital needs can be met by fintechs.
Q. More importantly, do you have specific solutions for the textilesapparel industry? This needs to be asked since not only is this industry very different from others, each cog in this supply chain is just as different from the ones preceding or succeeding it (in the chain).
- A. Opportunities for fintechs like us to create solutions for MSMEs are multi-fold. One of the solutions is to look at the overall supply chain, identify credit worthy parties that these MSMEs work with, and on the basis of business they do with these credit-worthy parties help set up template-based programmes where lending partners are comfortable issuing shorter tenure working capital based on confirmations from the buyers. In the textiles industry, while domestic business has been a large portion of their toplines, businesses are increasingly looking at exports to western markets like America and Europe, supplying to both the organised as well as the midmarket buyers in these regions. Large players from India export to buyers in these markets with the backing of LCs and guarantees from buyers. We estimate that over 70 per cent of the exports that the MSMEs do is on an open account basis. They end up waiting 60-90 days, sometimes up to 120 days, to realise payments.
Q. Implementing a solution for a small company would be meaningless without integration with other companies that it does business with. This would mean bringing others into the loop as well. How do you react to that?
- A. One of the reasons traditional supply chain finance as done by banks on their own has focused mainly on large, organised sectors and larger corporates within them is that it is a business which relies on corroborating a trade between both parties, which may include corporates as well as MSME counterparties. It has not been a viable option for banks to create a solution that enables them to directly interact with the MSMEs on a regular basis. And that is one of the biggest challenges that we took upon ourselves to address from day one. We created a digital solution which enables even the smallest of MSMEs to connect digitally with our platform. Just to elaborate, MSMEs operate on a multitude of accounting systems-from Tally to home-grown accounting systems to formats as simple as Word, PDF and Excel invoices. Working with such a wide variety of inputs is not easy for any of the traditional lenders or even for some of the newer players who are trying to address this space.
Q. Payments/receivables are a major issue with MSMEs in the textiles-apparel business where most of the transactions (even after demonetisation) are done in cash. How can matters be streamlined?
- A. The business cycles for most MSMEs in this sector are elongated and worrying about receivables is an issue that most face. Historically, yes, it has been a cash-dominated sector but our observation over the last couple of years, especially with the advent of GST, is that there is a positive domino effect. More transactions are being done in an organised, recorded manner and except for the last mile of MSMEs, a lot of tiers in between have already started seeing benefits coming through in the form of digital payments going to them. One of the bigger factors that will continue to drive this is the benefits of input tax credit that the larger players want to accrue due to which they push compliance on the next tiers of suppliers as well leading to a cascading effect. We believe cash transactions will reduce in the coming years which will also drive a lot more lenders to look at this space positively with the kind of data trail that these MSMEs will create.
Q. MSMEs in some particular segments of the textiles-apparel industry are investment-intensive. Many have a trying time in balancing between assets (mostly plant and machinery) and liabilities (loans and bad debts). What can be a solution?
- A. If one looks at overall capital investment or working capital requirement of any MSME in this space there are clearly two needs-one is the long-term funding requirement for financing their plant and machinery/ equipment, place of work etc. The second is the whole receivable and payable cycle that we referred to earlier. Traditional lenders have been focusing on the first problem. Fintechs are taking care of their working capital requirements by enabling financing against their payables or receivables in the form of short-term trade financing or supply chain financing, as we call it. This will lead to a lot more capital freed up for them to deploy in their business expansion and long-term needs.
- We can solve working capital problems in a simple and neat manner which means that any surplus capital gets pumped back into the business. Lenders will be a lot more comfortable at taking a higher exposure on their long-term requirements as well. Working capital solutions can bring in a fine balance in the form of unsecured financing of their receivables and payables; and can lead to further augmentation of capital for them even on their long-term requirements.
Q. Since much of the health of this industry depends on the MSME component, it is just as important that they don’t fall into the debt trap. How does one ensure this?
- A. It is important for MSMEs and even lenders to avoid the potential situation of over-exposure by giving out long-term loans or higher working capital limits beyond the MSMEs’ ability to pay back on an ongoing basis. That is why financing linked to the underlying trade is the best way to build exposure for this segment. The self-liquidating exposures can lead to a very regular, repeat financing cycle with a measured, metered credit exposure from the lender’s point of view. This can be enabled in the form of 30-60-90 days or may be maximum 120-day limits, where without any effort MSMEs can see regular drawdowns against these. That is a prudent way of building and mitigating the risk further.
Q. Which are the major banks that you have tied up with? How does it work for an MSME?
- A. At Vayana Network, we believe that different lending partners are needed to address the needs and solutions for different industries and MSMEs. We have a well curated mix of public sector, private sector and MNC lenders as well as some of the leading NBFCs as partners, including players who have deep acumen when it comes to the specific sectors that we are operating in. Vayana handles all documentation; creation and structuring of these programmes; so, the MSMEs have pretty much a single window for all their financing needs. Lenders know which MSMEs they are dealing with and what their business parameters look like. But the entire exercise of getting the documentation in order, working with the lenders, getting the sanctions in place and starting the short-term financing programme is a service that we offer to these MSMEs on a platter. We also cut down the challenge they face in dealing with local bank branches because Vayana runs these programmes on a centralised basis with all the lending partners it works with-a ready cooked meal where lines are set up for them to quickly start drawing down by sharing invoices on the Vayana Platform.