The missing piece in the National Logistics Policy is Supply Chain Financing

May 18, 2023 India Shipping News

Besides emphasis on upgrading physical and digital infrastructure, a financial intermediary that performs working capital management for buyers and suppliers and smoothes their cash flow problems will complete the National Logistics Policy and help the logistics sector expand faster.

RBI already has the regulatory framework and digital infrastructure necessary to bring about the integration of SCF into the National Logistics Policy.

India’s logistics industry is poised for a brighter future, thanks to the National Logistics Policy launched in September last year. The policy promises to upgrade the physical and digital infrastructure of the logistics sector and improve service efficiency. However, there is a missing piece in the puzzle that could make all the difference for businesses: the financial infrastructure.

Businesses need capital to thrive. This can be either short-term capital or long-term capital. In financial parlance, short-term capital is also known more ubiquitously as working capital. And working capital is the amount of money that a business has available to fund its day-to-day operations.

Logistics And Financial Flows

In the world of logistics, this is what is most important, because, at the end of the day, one of the objectives of improved logistics infrastructure is also to reduce the working capital cycle (time taken to realise revenue from the delivery of goods) of the businesses involved in the supply chain. Without sufficient working capital, a business may struggle to pay its bills or may miss out on opportunities to grow and expand.

So, while logistics involves managing the physical flow of goods through the supply chain, what is also important is managing the financial flow of goods through the supply chain.

Supply Chain Financing (SCF) is a solution that allows businesses to access working capital by using their supply chain as collateral. With SCF, buyers can strengthen their supply chain by providing suppliers with immediate access to working capital at a lower cost through a financial institution or intermediary, while the intermediary earns a profit by providing the financing (at a minimal fee). The buyer can then pay the intermediary at a later, agreed-upon date.

Benefits Of Supply Chain Financing

The most obvious benefit would be the improved cash flow for both buyers and suppliers. By using SCF, businesses can receive payment for their invoices earlier or choose to pay their invoices later. This enables businesses to have more working capital available to fund their day-to-day operations, invest in growth opportunities, and meet their financial obligations.

A less obvious benefit would be increased resiliency of the supply chain. The better cash flow management that SCF affords companies will enable them to be more resilient in the face of supply chain disruptions. Post-COVID, as per a 2021 EY report on the working capital performance of companies, businesses in India saw an average increase of six days on their working capital cycles.

This effect was more pronounced in small and medium enterprises which saw an increase of 14 days. Since SCF provides access to working capital at a lower cost compared to other forms of financing (because the financing is secured by the buyer’s creditworthiness), it bolsters a business’s ability to satisfy its short-term financial obligations and endure disruptions.

When Physical, Digital & Fin Infra Meet

In recent years, there has been a growing awareness of the benefits of SCF among businesses in India. Many large corporations have started implementing SCF programmes to help their suppliers access working capital at a lower cost, which has helped to strengthen their supply chains and improve their financial performance.

Reserve Bank of India already has the regulatory framework (FRA 2011) and digital infrastructure (TReDS) necessary to bring about the integration of SCF into the National Logistics Policy (NLP). With the setting up of the Unified Logistics Interface Platform (ULIP) as part of the NLP, a common digital platform for all participants in the supply chain, this process has been made easier.

Integrating the TReDS with the ULIP will augment the physical infrastructure upgrades the NLP aims to bring about with a solid financial infrastructure as well. This would create a system in which one cannot just track the movement of goods but also has a greater chance of receiving earlier payment for them given that the risk of non-deliverance on the part of the supplier is now mitigated.

The Next Boost For Logistics

Moreover, financial intermediaries will now be more willing to provide that working capital to the supplier at a lower cost on the back of reduced risk and more supply chain visibility. And directing these flows through the UPI will only bolster the system.

Easing the process of financial flows to improve logistical / supply chain efficiency can also have positive spillover effects, for instance, in the payments ecosystem. In international trade, the Unified Payments Interface (UPI), which is already gaining global recognition, will become a more attractive option for companies wanting to source or export products from and to India.

The National Logistics Policy in India is a welcome and long overdue step towards upgrading the logistics sector. However, for businesses to truly benefit from these improvements, it is crucial for the Indian government to also address the issue of working capital management in the NLP.

Supply Chain Financing can provide a viable solution for businesses to access working capital at a lower cost, improve their cash flow, and reduce supply chain risks. By implementing SCF along with the NLP, businesses in India can not only survive but also thrive in a highly competitive and dynamic logistics landscape.

The increased competitiveness SCF can bring about by attracting more players will also improve economies of scale further reducing the cost of logistics. With these measures in place, India’s logistics industry can enable businesses to focus on growth and expansion while also facilitating the seamless movement of goods across the country.