The rise of supply chain finance enabling to bring rural India into the mainstream economy – Times of India

Micro Small and Medium Enterprises (MSMEs) and agriculture are the two major pillars of the Indian economy. 

The sunrise sector contributes to 25% of GDP. However, the total bank credit to Agri and allied services is Rs 12 trillion, which amounts to only 12% of the total bank credit. This is because the farming sector still predominantly borrows from informal sources.

According to the Draft National Policy of MSMEs, there are a whopping 6 crore units, primarily located in rural parts of the country. MSMEs employ over 11 crore people and have a 28% share of GDP and 40% exports. Despite such a significant contribution, core sectors struggle to be part of the mainstream economy and financial ecosystem.

The world is resorting to Supply Chain Finance (SCF) as an apt solution to help their rural economy meet the working capital requirements, and India is following the suit.

Global v/s Indian SCF Footprint

Supply Chain Financing (SCF) has witnessed widespread acceptance on the global map, and a more significant uptick post the Covid-19 pandemic. According to data published by BCR in its World Supply Chain Finance Report, SCF volumes touched USD 1.31 trillion in 2020, and the market is estimated to grow at a CAGR of 17.1%.

Supply-side economies like the USA, Europe, Middle East, and APAC are expected to have maximum influence with the diverse supplier base. To help MSMEs recoup losses and encourage financial institutions (FIs), Guarantee Funds have been created in countries like Belgium, France, Germany, Switzerland, Spain, Singapore, Canada, etc, that provide up to 80-90% guarantee on the loans. 

In India, SCF penetration is at a far slower pace than its global counterparts. The Indian SCF market size is estimated to be about Rs 60,000 crore and contributes below 5% of the entire banking system’s outstanding assets. This is primarily because of low financial literacy and low financial inclusion of rural MSMEs and the agricultural sector. 

The Agri supply chain works a bit differently than other sectors since it is largely an unorganized sector. To be part of the formal credit ecosystem the sector needs to run like any other organized sector in the economy. Agrtitechs and government initiatives are providing farmers the much- needed support to organize the Agri supply chain process. 

Agri Supply Chain Finance

Farmer Producer Organizations (FPOs) are formed to help organize and streamline the Agri supply chain. These membership-based organizations aim to develop and deploy the aggregation mechanism for farmers, wherein farmers can pool their resources to form a group to jointly deal with various farming issues like credit, input sourcing, technology adoption, or onward sale of agricultural produce.

FPOs supply cattle feed and other Agri inputs to the farmer on credit which appears as receivables on the FPOs books. The credit period varies from 6-9 months and in some cases more than a year. Through supply chain finance, the funding can be directly done to the FPOs for funding the receivables for the farmers; since financing the farmers directly might be unavailable due to reach, lack of  credit history,  recovery, and operational costs. The lenders’ risk is mitigated to some extent as repayments are done from FPOs’ own cash flows.


The time is ripe to encourage rural MSMEs and FPOs to onboard digital SCF platforms and open doors to supply chain financing to address their working capital woes. The agricultural segment undoubtedly has a large credit demand and potential. Lending can be a carrot for farmers to rapidly adapt to digitization for various activities which can have a ripple effect on  GDP growth.

The advancement and implementation of Guarantee Funds like other countries can act as a catalyst in driving supply chain financing as a viable lending mechanism to rural India.



Views expressed above are the author’s own.


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