1. Supply Chain Finance

2. 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.

3. 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

4. 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

5. 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

6. 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

7. 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.

8. 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.

9. 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

10. 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

11. 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

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

13. 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

14. 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

15. Thank You