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Global Head-Sales & Mktg Vayana Network
Payments/receivables are a major issue with MSMEs in the textiles-apparel business where most of the transactions (even after demonetisation) are done in cash. How can matters be streamlined?
The business cycles for most MSMEs in this sector are elongated and worrying about receivables is an issue that most face. Historically, yes, it has been a cash-dominated sector but our observation over the last couple of years, especially with the advent of GST, is that there is a positive domino effect. More transactions are being done in an organised, recorded manner and except for the last mile of MSMEs, a lot of tiers in between have already started seeing benefits coming through in the form of digital payments going to them. One of the bigger factors that will continue to drive this is the benefits of input tax credit that the larger players want to accrue due to which they push compliance on the next tiers of suppliers as well leading to a cascading effect. We believe cash transactions will reduce in the coming years which will also drive a lot more lenders to look at this space positively with the kind of data trail that these MSMEs will create.
MSMEs in some particular segments of the textiles-apparel industry are investment-intensive. Many have a trying time in balancing between assets (mostly plant and machinery) and liabilities (loans and bad debts). What can be a solution?
If one looks at overall capital investment or working capital requirement of any MSME in this space there are clearly two needs-one is the long-term funding requirement for financing their plant and machinery/ equipment, place of work etc. The second is the whole receivable and payable cycle that we referred to earlier. Traditional lenders have been focusing on the first problem. Fintechs are taking care of their working capital requirements by enabling financing against their payables or receivables in the form of short-term trade financing or supply chain financing, as we call it. This will lead to a lot more capital freed up for them to deploy in their business expansion and long-term needs.
We can solve working capital problems in a simple and neat manner which means that any surplus capital gets pumped back into the business. Lenders will be a lot more comfortable at taking a higher exposure on their long-term requirements as well. Working capital solutions can bring in a fine balance in the form of unsecured financing of their receivables and payables; and can lead to further augmentation of capital for them even on their long-term requirements.
Since much of the health of this industry depends on the MSME component, it is just as important that they don't fall into the debt trap. How does one ensure this?
It is important for MSMEs and even lenders to avoid the potential situation of over-exposure by giving out long-term loans or higher working capital limits beyond the MSMEs' ability to pay back on an ongoing basis. That is why financing linked to the underlying trade is the best way to build exposure for this segment. The self-liquidating exposures can lead to a very regular, repeat financing cycle with a measured, metered credit exposure from the lender's point of view. This can be enabled in the form of 30-60-90 days or may be maximum 120-day limits, where without any effort MSMEs can see regular drawdowns against these. That is a prudent way of building and mitigating the risk further.
Which are the major banks that you have tied up with? How does it work for an MSME?
At Vayana Network, we believe that different lending partners are needed to address the needs and solutions for different industries and MSMEs. We have a well curated mix of public sector, private sector and MNC lenders as well as some of the leading NBFCs as partners, including players who have deep acumen when it comes to the specific sectors that we are operating in. Vayana handles all documentation; creation and structuring of these programmes; so, the MSMEs have pretty much a single window for all their financing needs. Lenders know which MSMEs they are dealing with and what their business parameters look like. But the entire exercise of getting the documentation in order, working with the lenders, getting the sanctions in place and starting the short-term financing programme is a service that we offer to these MSMEs on a platter. We also cut down the challenge they face in dealing with local bank branches because Vayana runs these programmes on a centralised basis with all the lending partners it works with-a ready cooked meal where lines are set up for them to quickly start drawing down by sharing invoices on the Vayana Platform.
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