Supply Chain Finance

Overview – Supply Chain According to general banking practice supply chain finance provides option to seller and buyer for financing open account transaction at different stages or milestones of the companies supply chain activities. These solutions are provided to large companies to support their small/medium size suppliers From Bank’s perspective “Supply Chain” typically refers to post-shipment finance programs that allows Suppliers to obtain payment before due date against their invoices “approved” for payment by their buyers. The solutions can be further categorized in terms of invoice financing, receivables financing, factoring, reverse factoring etc. Currently banks are adopting more expanded view to encompass all financing solution that supports the company’s buyers and sellers.

Therefore Supply Chain Finance broadly includes a corporate led bilateral financing program to provide working Capital Facilities to their distributors and vendors. The solution is based on a "Partnership Approach" with the respective Corporate acting as sponsor and agrees to exercise some level of control and provide assistance to Bank Supply Chain Finance Supplier Finance Distributor Finance Purchase Order Finance Restricted Funning Finance Invoice Finance Reverse Factoring Short Term Loan Receivables Purchase

Supplier Supplier Finance Dealer Finance Variants of Supply Chain Finance Sub Supplier Supplier Distributor Sub Distributor Corporate / Sponsor Pre-shipment Post-shipment Restricted RF Short-term Finance Supplier Finance Dealer Finance Fundamentally, the supplier finance structure is transaction based, where actual sale and purchase of goods and/or services are involved on an open account basis, corporate (Sponsor) buys from their suppliers and financing is provided to suppliers as a source of early payment. It focuses on the underlying relationship between buyer and seller and finances only that part of transaction which has strong linkage with sponsor supply chain The financing is provided to Sponsor’s distributors to meet their floor plans and primary sales. The program is based on Sponsor’s value chain strength and interdependency between them, particularly dealer/distributors livelihood and cash flows are directly related to the Sponsor's product strength and market demand, providing clear direction of future business growth of distributor

Receive acceptance of Sponsor Supplier Finance Receive acceptance of Sponsor Shipment Effected Issuance of POs Final Payment Up to 120 days Pre-shipment Finance Day 45 Day 0 Day 10-15 Post Acceptance Pre-acceptance Procurement / Production Financing up to 180 days Pre-shipment may consists of full range of trade facilities, for example: Import LC issuance (for import of raw materials) Import Financing (for import of raw materials) Financing up to 70% of PO value Pre-acceptance Financing: Financing up to 90% of invoice value Post-shipment Requires simple docs for financing up to 100% of invoice value Committed SLA : credit supplier’s designated account within

2. Principal's acceptance of invoices and debit Authority Invoice finance structure - process flow 1. Goods, invoice, delivery order etc Supplier 2. Principal's acceptance of invoices and debit Authority Principal 3. Supplier submits invoice and relevant documents. 4. Proceeds less discounting charges or full discount amount 5. Full payment of invoice value to the bank

Structuring Techniques – Credit Process Four primary recourse options Risk is wholly on the supplier with no recourse Risk is wholly on the supplier with possible form of recourse Risk is wholly on the buyer without recourse to the supplier Risk is shared in some agreed proportion between the parties.

Distributor Finance Invoice Financing Restricted Overdraft The Bank finances genuine trade bills covering Principle’s supplies to its distribution network. Dealer sends the accepted invoice and delivery/warehouse confirming and authorizing Bank to debit its loan account and pay to principle Distributor may deposit funds in his Bank operating account with sales proceeds through collections mechanism, or lodge cheque in clearing for settlement on maturity date. Mark-up is either for account of the Principle or charged to dealer. Mark up to be charged monthly or at the time of payment of invoice. Restricted Overdraft Dealer will open a Dealer Finance Account, which will be used as Dealer finance Restricted Over draft The dealers loan account would be drawn only to make payments to Principle’s collection account through restricted options such as direct debit The account will be restricted for issuance of any other instruments except for payment to principle Dealer settles their out standing either lump sum or partially.

Structuring Techniques – Credit Process Four primary recourse options 1. Full recourse on Sponsor 2. First Loss Default Guarantee or Loss make up guarantee 3. Nil recourse on Sponsor with assignment of dealer bank guarantee 4. Nil recourse on Principle Recommendation Letter of distributor to be obtained including: Distributor Name and contact information Sales turnover for current and previous year Length of relationship with Company Confirmation of any trade overdue to the best of Company’s Knowledge For options 4 following undertakings may be required Assistance in recovery Stop supply agreement Prior intimation to Bank in case of termination of distribution

Initiating the SCF program Strategic – Identifying the key objectives Structuring techniques for distribution network Streamline payment modes – Single bank with pull strategy Build up distribution loyalty Tactical – Identify Distributors Working Capital Cycle Estimating Distributors working capital cycle Funding estimations and stock norms Limit churn and sales throughput Program Commercialization On boarding distributors Pilot Phase approach Program Roll out

Strategic – Covers initiation with sponsor to achieve benefits Defining long term benefits through Program Distributor’s Sales Profitability Liquidity ROI Debt ratio Transparency of Finances Defining criteria for Dealers selection and eligibility Defining parameters to operate Dealer Finance Facility Determining the scale, coverage and quantum of facilities Align internal systems for monitoring and control

Tactical Determining inventory levels and average receivables Stock Norms and facility alignment Defining Facility calculation method – Stocks Receivables Stock Norms – Primary

Post Disbursement of Facility Program Commercialization On – Boarding Dealers Prepare for pilot phase Chose x number of dealer for implementation Drive the pilot phase to streamline initial problems Program Roll out and building blocks Dealers selection and screening against program criteria Branch mapping with Dealer’s location Dealer’s arrangement for collections Dealer’s initial documentation Approval Process Security documentation Limit Implementation Post Disbursement of Facility Monitor utilization levels Through put meets the targeted levels

Why Specific Products - SME Constraints in Traditional Finance Benefits in Specific SCF products • SMEs are regarded as high-risk borrowers due to insufficient assets and low capitalization, vulnerability to market fluctuations and high mortality rates. • Information asymmetry arising from SMEs’ lack of accounting records, inadequate financial statements or business plans makes it difficult for creditors and investors to assess the creditworthiness of potential SME proposals. • vulnerable to use funds in short opportunities or to divert in non core activities. Reducing information asymmetry of SMEs by mutually sharing information with sponsors. The chances of misrepresentation on part of borrower shall be considered negligible due the independent confirmation by Sponsor. Special support and agreements with Sponsors. Using covenants over and above the loan agreement • Developing products better adapted to SME needs pertaining to particular industry

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