The impact of COVID-19 pandemic on global trade and manufacturing has been severe and profoundly intensifying. Consequently, it has significantly impacted the economic supply chain. When we talk of the economic supply chain, it’s the process through which goods are produced and sold to the ultimate end user, from the acquisition of raw materials, to the production, transport and warehousing of the final product, to the final purchase. While a supply chain can be made up of many links, at each link in the chain there is a supplier (who supplies the goods being sold) and a buyer (who buys the items being sold).
The outbreak of the pandemic in December 2019 forcing the government to impose strict lockdowns across the country coupled with its second deadliest wave in 2021, caused heavy disruptions in the economic supply chain. The business community witnessed never-seen-before pressure on their operations as it suddenly became the most difficult job for them to stay afloat in the pandemic-driven environment. The businesses faced huge constraints on working capital. Large companies supplying the goods were compelled to revisit their business strategy and introduced punitive payment terms for their clients in the aftermath of the virus outbreak. All this summed up in the shape of pressure on countless small and medium businesses facing working capital starvation. For these small and medium enterprises (SMEs) staying afloat amidst the funds shortage has been a stiff challenge as they are unable to withstand the punitive
It’s here the need for funding the supply chain arises. In other words, the need for financing arises from the combination of a supplier (who supplies the goods) and a buyer (who buys the items being sold). This type of financing is known as ‘Supply Chain Financing’ (SCF). This financial solution, which is short-term in nature, aims to lower financing costs and improve business efficiency for buyers and sellers linked in a sales transaction.
This model of short-term financing offers distinct advantages to all participants. It optimizes working capital and provides liquidity to sellers as well as buyers. While suppliers gain quicker access to money they are owed, buyers get more time to pay off their balances. On either side, the buyers and sellers can use the cash on hand for other projects to keep their business operations running smoothly.
It is notable that the supply chain finance (SCF) works best when the buyer has a better credit rating than the seller and can consequently source capital from a bank or other financial institution at a lower cost. Here the buyer is in the driving seat to negotiate better terms from the seller, such as extended payment schedules. Even the seller is at advantage in the sense that the company can unload its products more quickly and receive payment without any risk of delay from the bank which is an intermediary financing body in the supply chain transaction.
Precisely, in this type of finance, there are three basic participants:
– Reputed Manufacturing Companies (RMC)/ Suppliers/ Corporates also known as Principal or Anchor (Top Level)
– Dealers/Distributors/Channel Partners also known as Spokes (Bottom Level)
– Bank (Financing Agent)
Now the main question: Is this type of finance – ‘Supply Chain Finance’ – facility available to the local businesses here in J&K? Of course, the scheme is available for local businesses to help them to come out of the working capital constraints and stay afloat in their businesses. J&K Bank has placed ‘Supply Chain Finance’ facility at its branches to provide financial assistance to Authorized Dealers/ Distributors/Channel Partners of Reputed Manufacturing Companies/ Suppliers/ Corporates for procurement of inventory/stocks from registered manufacturing companies (RMCs)/Suppliers/Corporates.
What are the eligibility criteria for businesses to avail the facility?
First it’s to be seen whether the Anchor falls within the ambit of the scheme or not.
The Anchor should be reputed Corporates/mid Corporates dealing in reputed /popular brands, with an external credit rating of not less than “BBB” or equivalent which should not be older than 1 year.
The goods to be supplied under the arrangement may be FMCG, electronic & electrical equipment, Iron & Steel Products, Vehicles and other goods with a very good market demand.
As far as minimum eligibility criteria for Spoke is concerned, it should be an established business entity having an existing relationship with the Anchor for a minimum period of 2 years. Besides, it should have positive operating profit and Net Worth in the previous financial year and should be of sound financial position /track record of dealings & conduct. A certificate by the Anchor certifying a good track record of two years for honoring its commitments is a must. The entity should not be a defaulter with any bank/FI and should have achieved a Sales Turnover of at least Rs. 1.00 Crores in the Previous Financial Year.
Are new business entities eligible to avail the facility?
Yes. New entities can also avail the facility subject to providing of tangible collateral having forced sale value equivalent to or more than 110% of the limit sanctioned. Besides they should have an internal risk rating score of upto 5 (five) on the bank’s internal rating module. However, the dealers having internal rating of 6 can also be considered subject to the condition that they provide tangible collateral having forced sale value of 100% or above of the sanction limit.
How much loan can be granted under the scheme?
The quantum of finance per spoke is actually need-based, but minimum Rs.25 lakhs. There is no upper limit.
What is the time period of credit?
It’s upto 90 days (Maximum). However, there is a grace period of 15 days over and above the credit period.Notably, the borrower is not required to pay margin. The scheme envisages 100% financing of invoices.
What is the mode of disbursement?
100% of invoice amount to be disbursed directly into the Anchor’s account via direct Bank transfer/NEFT/RTGS or any other fund transfer mode. So, a one-time special debit mandate has to be obtained from the Spoke/s for debiting its account through a standard covenant in loan agreement.
It’s to be noted that for day-to-day operations, the borrower has to open a separate current account. Current Accounts with other Banks have to be closed.
What type of security is required from the borrower?
It’s primarily hypothecation of Stocks/Goods financed by the Bank & Receivables thereof.
Collaterally, the bank would be securing the loan through a tangible Collateral security in the form of residential or commercial property OR Cash collateral in the form of Term Deposits. The minimum Forced Sale Value of property/principal amount of term deposits shall be 50% of the Sanctioned Limit.
Besides, personal guarantee of the Promoter / Director/ Partner / Proprietor/ Owners of securities is required.
What is the repayment schedule of the finance?
Borrower has to make repayment of invoices financed by the Bank within the agreed credit period cum grace period or as soon as the sales proceeds are realized whichever is earlier. Sales proceeds shall be credited to the “SCFS” Account immediately on realization.
It’s notable that penal Interest will be levied on the amount in default, if the borrower fails to make the repayment within the credit period and grace period as specified at the time of sanction.