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Banking & NBFCs SCF Playbook: Structuring SCF for Large Corporates

Supply Chain Finance (SCF) is a strategic tool for banks and NBFCs to enhance liquidity in the ecosystem, optimize working capital for corporates, and drive financial inclusion for suppliers and distributors. By leveraging SCF, financial institutions can create scalable, risk-mitigated lending solutions while supporting large corporations in strengthening their supply chains.

This playbook provides a structured approach for banks and NBFCs to design and implement SCF programs tailored to large corporate clients.

• 1. Understanding SCF in the Corporate Context

What is Supply Chain Finance (SCF)?

SCF is a set of tech-enabled financial solutions that allow large corporates and their suppliers/distributors to optimize cash flow, reduce financing costs, and improve working capital cycles.

SCF is not traditional lending but a structured financing approach based on real economic transactions (approved invoices, purchase orders, inventory holdings, etc.), reducing the risk of bad debt.

• 2. Key SCF Structures for Large Corporates

A. Reverse Factoring (Buyer-Led SCF)

• Large corporate buyers partner with banks/NBFCs to provide early payments to their suppliers.
• The buyer’s strong credit rating enables suppliers to access lower-cost financing.

  i. Best for: Large corporates with strong credit ratings & extensive supplier networks.

  ii. Benefits:
  

  1. Suppliers get instant liquidity at lower interest rates
  2. Buyers get extended payment terms without impacting supplier cash flow.
  3. Financial institutions benefit from low-risk financing.

  iii. Implementation Model:
  

  1. Corporate buyer onboards suppliers into the SCF program.
  2. Suppliers raise invoices, and the buyer approves them.
  3. The bank/NBFC pays the supplier early at a discounted rate.
  4. The buyer settles the full amount with the bank/NBFC on the due date.

  iv. Key Considerations:
  

  1. Credit underwriting based on buyer strength.
  2. Tech integration for automated invoice processing & approvals.

B. Dynamic Discounting (Cash Flow-Based Early Payment Model)

• Large corporates use excess cash reserves to offer early payments to suppliers in exchange for discounts.
• No third-party financing is involved, making it a self-sustaining model.

  i. Best for: Large corporates with strong credit ratings & extensive supplier networks.

  ii. Benefits:
  

  1. Reduces supply chain disruptions by ensuring supplier liquidity.
  2. Improves corporate buyer profitability through negotiated discounts.
  3. Eliminates third-party financing costs.

  iii. Key Considerations:
  

  1. Automated early payment discounting platforms are required.
  2. Corporate treasury integration for real-time liquidity assessment.

C. Invoice Discounting (Receivables Finance)

• Suppliers sell approved invoices to banks/NBFCs for early payment, reducing working capital constraints.
• The buyer repays the financier on the due date.

  i. Best for: Large corporates working with fragmented supplier networks.

  ii. Benefits:
  

  1. Improves supplier cash flow without impacting buyer payment cycles.
  2. Banks/NBFCs earn financing spreads with low risk due to buyer validation.

  iii. Key Considerations:
  

  1. Risk assessment based on buyer credibility, not the supplier’s credit profile.
  2. Digitized invoice processing for efficiency and fraud prevention.

D. Inventory Financing (Stock-Based SCF)

• Large corporates or distributors secure financing based on their inventory holdings.
• Banks/NBFCs use warehouse receipts or inventory reports to extend credit.

  i. Best for: Manufacturers, FMCG, auto, and retail sectors with significant inventory needs.

  ii. Benefits:
  

  1. Ensures continuous production and sales by avoiding stock shortages.
  2. Financial institutions get collateralized exposure, reducing lending risk.

  iii. Key Considerations:
  

  1. Real-time inventory tracking & valuation mechanisms are crucial.
  2. Structured agreements with third-party warehouse providers.

E. Purchase Order (PO) Financing

• Banks/NBFCs fund suppliers based on confirmed purchase orders from large corporates.
• Suppliers use the financing to procure raw materials and fulfill orders.

  i. Best for: Large corporates working with MSME suppliers.

  ii. Benefits:
  

  1. Ensures supplier production capacity without upfront capital constraints.
  2. Reduces corporate risk of supply chain disruptions.

  iii. Key Considerations:
  

  1. Strong PO validation & fraud controls are essential.
  2. Integration with corporate ERP for automated financing approvals.

• 3. Structuring an SCF Program: A Step-by-Step Approach

Step 1: Corporate Buyer Onboarding & Risk Assessment

• Identify high-creditworthy corporate clients to launch the SCF program
• Evaluate their supplier/distributor ecosystem and financing needs.
• Assess historical payment cycles and working capital trends.

Step 2: Selecting the Right SCF Model

• Reverse Factoring : If the corporate has strong credit & wants supplier financing.
• Invoice Discounting : If fragmented suppliers need early payments.
• Inventory Financing : If distributors need stock-based financing.
• PO Financing : If suppliers lack upfront capital for order fulfillment.

Step 3: Setting Up the Technology & Processes

• Integrate with corporate ERPs & invoicing systems to automate approvals.
• Establish real-time transaction tracking with AI-driven risk monitoring.
• Develop API-based connectivity for seamless bank-NBFC integration.

Step 4: Partnering with Banks, NBFCs & FinTechs

• Collaborate with multiple financing partners to diversify risk.
• Use co-lending & securitization models to scale SCF exposure.
• Ensure regulatory compliance (RBI guidelines for SCF lending).

Step 5: Continuous Monitoring & Expansion

• Monitor transaction patterns using AI-based fraud detection tools.
• Scale the SCF model to multiple corporate clients & supply chain tiers.
• Offer customized SCF pricing based on corporate and supplier risk profiles.

• 4. Risk Management & Compliance in SCF

• Buyer Credit Risk Assess corporate financial health before onboarding.
• Supplier Fraud Risk Implement e-invoicing & digital KYC for validation.
• Regulatory Compliance Adhere to RBI norms & structured lending policies.
• Operational Risk Use real-time monitoring & AI-based analytics.

• 5. Future Trends in Corporate SCF

• AI-Powered Risk Models Automating credit scoring & fraud detection.
• Blockchain-Based SCF Enhancing transparency in invoice verification.
• Tokenized Invoices Digital asset-backed financing for instant liquidity.
• Embedded SCF in Trade Platforms Direct integration with B2B marketplaces.
• ESG-Linked SCF Green financing for sustainability-focused corporates.

• 6. Conclusion: Why Banks & NBFCs Should Focus on SCF

SCF presents a high-growth opportunity for banks and NBFCs to expand lending portfolios, de-risk corporate exposures, and drive financial inclusion. With the right technology, partnerships, and risk models, financial institutions can scale SCF profitably while empowering large corporates and their supply chains.

i. Key Takeaways:

1. SCF reduces risk by leveraging corporate credit strength.
2. Digital integration is key for scalability & efficiency.
3. Multi-tier financing expands supply chain liquidity.

🚀Time to unlock the full potential of SCF for corporates!