Concept of Financial Supply Chain Management System in Indian Banking Sectors
1. Dr. Debasri Dey (Corresponding Author)
Associate Professor, Brainware University, Barasat Campus
2. Devdeep Banerjee
State Aided College Teacher, Dept. of Commerce, Jogamaya Devi College, Kolkata and Ph. D Research Scholar, Dept. of Commerce, University of Gour Banga, Malda
Abstract
The global financial crisis of the early 2000s caused capital markets to become extremely volatile, thereby highlighting the importance of Supply Chain Finance and necessitating more rigorous study of the banking industry from the standpoint of SCM. Despite the scarcity of scholarly research in the banking industry, the development of a supply chain management model in this sector is undertaken. The outcomes of this study are expected to provide new research opportunities in the supply chain finance and banking industries. Consequently, this research opens up further avenues for prospective researchers in this field. Further, this study demonstrates how Supply Chain Management (SCM) theory has been evolved over time and how it is applied in the banking industry, which is represented as one of the service industries. The various milestones of SCM evolution in various industries have been identified to facilitate comprehension.
Keywords: Banking Industry, Financial Supply Chain, Supply Chain Management, etc.
Introduction
Market revenues have now been exceeded by Supply Chain Finance, surpassing traditional trade finance. This trend is expected to accelerate over the next three to five years, driven by three waves: deepening of established solutions targeted at suppliers, further integration and sophistication of products for buyers, and ultimately, convergence between buyer and supplieroriented solutions. This research article is focused on these three waves and the opportunities each one holds for banks. A crucial role in facilitating Supply Chain Finance is played by banks, which act as intermediaries providing necessary financial services to suppliers and buyers. The buyers’ creditworthiness is assessed by banks, and a financing program is created based on their risk profile. An attractive opportunity to expand services and deepen relationships with corporate clients is presented to banks by supply chain finance.In Supply Chain Management (SCM), academics have tended to focus on how to generate more profit during the previous decade. Value addition, cost lowering, or reaction time shortening are some of the research aims for various stakeholders engaged in the industrial supply chain. However, research in non-profit organizations has been conducted in limited numbers. In academia, an incredibly small number of research articles are devoted to SCM in the banking industry. To obtain competitive advantages in today’s intensely competitive global economy, Supply Chain Management (SCM) has emerged as a critical component of business strategy (Simchi-Levi et al., 2008). Since researchers and managers began evolving into SCM studies and practices, a significant amount of literature has been published on this subject. The majority of extant definitions of SCM are concerned with the movement of products and information from suppliers to consumers. As a result, SCM has historically been classified as part of Operations Management. SCM is mostly applied in industrial sectors, with only a small number of applications in service industries. Over the last few decades, the service industry has grown in importance as the driving force in the global economy. Moreover, in tandem with the rapid expansion of the service economy, the labour force has been changed, with a majority of workers transitioning from the manufacturing sector to the service sector, consistent with Clark’s assumption stated sixty years ago (Lin et al., 2010). Furthermore, industrial corporations, such as General Motors and IBM, are generating more and more income from their service divisions. Typical manufacturing companies’ added value is mostly created by their service constituents (Lin et al., 2010). Supply chains are widely recognized as the integration of material, information, and financial exchanges between and across businesses. Decades of research have been conducted to better understand supply chain management in relation to material flow and process flows. The research agenda is constantly expanding. Supply Chain Finance (SCF), the management of financial flows from a supply chain perspective and in combination with other flows, has received little attention (Caniato et al., 2019).
Research Objectives
A notable gap in the literature on financial and banking supply chains has been identified, despite the extensive academic work dedicated to Supply Chain Management (SCM), which predominantly focuses on manufacturing supply networks. This gap necessitates closure. This paper aims to:
a. Conduct a comprehensive analysis of secondary data-based literature evaluations on SCM.
b. Provide definitions of SCM and its evolution in various contexts.
c. Examine the latest SCM developments and their effects on the banking industry.
Research Methodology
The discussion of this research is supported by the utilization of secondary materials, including publications such as books, journals, conference papers, and digital libraries. Academic and practitioner SCM research papers have been published in esteemed international journals, notably EMERALD, PROQUEST, the IEEE, ACM, EBSCO, Science Direct, and JSTOR. A comprehensive survey of the literature has yielded an evolutionary timeline and forecasts for the future. Supply Chain Management (SCM) is classified in diverse ways across industrial and service sectors, which are gradually discussed in subsequent sections of this research paper.
Literature Review
A. Definitions of SCM: Supply chain management is defined as the management of product and service movement along the supply chain. Various activities, such as storage, shelf-life analysis, procurement analysis, goods sold analysis, and transportation, are encompassed. Organizational net value is created through the facilitation of supply chain management, which assists in planning and executing supply chain activities. Market trends related to demand and supply are identified and synchronized to evaluate organizational performance
(Jaggi & Kadam, 2016). Value is added to customers and stakeholders through Supply Chain Management (SCM), which integrates essential business activities from end-users to original suppliers (Desai & Rai, 2016). Consumer expectations are met and supply chain competitiveness is enhanced through the integration of organizational units along the supply chain and coordination of commodities, information, and financial flows (Dias & Ierapetritou, 2017).
Value is added for customers and stakeholders through the utilization of supply chain management, thereby facilitating the distribution of products, services, and information from end-users to original suppliers (Wibowo et al., 2017). The supply chain is defined as the collective engagement of various companies and individuals that transport products or services from one supplier to another. Finished products are produced and delivered to the ultimate consumer through the supply chain, where natural resources, raw materials, and component parts are transformed. Value in the form of products and services supplied to the final customer is generated through an organization’s network, comprising numerous processes and activities that are linked upstream and downstream (Kain & Verma, 2018). The core philosophy of the supply chain is encapsulated in the following principles (Mukhamedjanova, 2020): 1. The supply chain is conceptualized as an integrated system that facilitates comprehensive management of commodity flow from supplier to final client. 2. Internal operational and strategic convergence is achieved through collaborative efforts. 3. Customer satisfaction is prioritized by having value propositions tailored to meet distinct customer needs.
B. Financial Supply Chain: Material, information, and financial flows along supply networks have long been recognized as part of supply chain management (SCM), which encompasses the structure, coordination, and integration of such flows. Considerable attention has been paid to material and information flows in theory and practice, but little analysis and improvement have been made to money flows (Caniato et al., 2019; Wuttke et al., 2016). Before the global financial crisis of 2008-2009, companies were not required to deal with liquidity issues or actively manage their supply chain’s working capital, as capital markets were liquid. During the financial crisis, the stability of the global supply chain was put in jeopardy due to the credit crunch, which led to the bankruptcy of many suppliers (Hofmann & Belin, 2011). The importance of partnering with supply chain partners and financial institutions to manage money flows has been appreciated by companies worldwide. Innovative methods for streamlining financial distribution networks have been sought (Boer et al., 2015).
Financial Supply Chain Management (FSCM) and supply chain finance (SCF), two newly founded academic fields, have been utilized to design such solutions. SCF is frequently used in place of the more technically accurate term (Gelsomino et al., 2016). Inter-organizational money flows are hoped to be improved through the use of financial institution or technology company-developed solutions. Better cash-flow management is achieved by better matching financial flows across the supply chain with product and information movements (Gelsomino et al., 2016; Lamoureux & Evans, 2011). A set of financial, technological, and managerial tools to help companies improve working capital management and free up cash trapped in supply chain processes and transactions are provided by SCF (Caniato et al., 2016). Financial conflicts between suppliers and buyers can be resolved by SCF techniques, thereby strengthening their ties. Payment terms are typically imposed by stronger companies, such as big buyers, on weaker firms, such as smaller suppliers. Weaker businesses are less likely to amass financial resources to sustain larger levels of working capital and face higher borrowing costs. In the long term, supply chain inefficiencies and dangers are led to. Win-win scenarios for both buyers and suppliers can be created by SCF, such as by offering financing options that allow buyers to defer payment, while suppliers get paid faster and at a lower rate. Strategies have been developed to improve the financial health of the supply chain by reducing both buyer and supplier working capital (Hofmann et al., 2018). Several SCF options have been discussed in the literature (Caniato et al., 2016). Initially, SCF systems emphasized one-to-one relationships between large buyers and their suppliers, but more recently, multitier solutions have been developed, incorporating companies from different levels of the supply chain, driven by a focal firm.
C. Supply Chain in Banking Industry: The tightening of global credit is seen by banks as both a short-term problem and a long-term opportunity. Despite the fact that cross-border opened account commerce between corporation’s accounts for the great majority of crossborder opened account transactions, research implies that a significant portion will be moved to a bank-assisted technique in the coming years. A desire for banks to facilitate more innovation in supply chains through their services has been expressed by companies and governments alike (Casterman, 2010; Popa, 2013). Supply chain finance is generally considered to be the responsibility of a commercial bank’s lending section. Working capital management is offered as a service by relationship banks to their large company clients in the form of loans. At the same time, suppliers are provided with various prompt payment alternatives (Popa, 2013).
Various tools and management strategies for efficiently managing and regulating money flows across supply chain participants have been shed light on by SCF research. The relevance of SCF has not been lessened since the crisis, due to the development of conservative loan models and increasing regulatory capital requirements for banks, resulting in a scarcity of financing for many small and medium-sized businesses (Caniato et al., 2019; Lekkakos & Serrano, 2016). SCF services were first provided by large banks. In response to the increasing demand for SCF, new and novel financing methods have emerged, and platforms such as financial institutions and “fintech” have later entered the market (Caniato et al., 2016). As a result, the SCF market is highly fragmented at present. Companies are often pushed to join and operate on many distinct SCF platforms run by banks and financial industry providers (Nienhuis et al., 2013). Prior to expanding into other areas, SCF’s primary focus was placed on improving working capital and liquidity management. Currently, emphasis is placed on communication and effectiveness by SCF solutions (Caniato et al., 2019).
Analysis
Three waves of growth in supply chain finance is depicted through figure-2 below:
Wave 1: Supplier Solutions
The existence of receivables finance dates back to the mid-19th century, with significant growth being experienced over the last decade. In developed markets, growth has been driven by the extension of payment terms by buyers to suppliers and the restriction of unsecured credit availability to smaller companies following post-financial crisis restructuring. Emerging markets have also witnessed strong recent growth, characterized by constrained unsecured credit and limited alternative financing product markets. Receivable’s finance is primarily provided by banks, but numerous fintech offerings have recently emerged. Platform-based solutions, such as Market Invoice, Sancus, and Liquid X, are linking borrowers and investors, and as they expand, bank margins will face pressure, potentially leading to disintermediation in specific market segments.
Wave 2: Buyer Solutions
The market has experienced rapid growth since the emergence of buyer-led solutions over 25 years ago, particularly over the last decade. Supply chain finance programme mandates are bid on by banks, and these programmes are pitched to existing large corporate clients. In this market segment, platforms have emerged, providing aggregation services to clients through providers like Prime Revenue, Obrien, and Demica. Financing is made available from multiple banks and non-banks. The multi-bank nature of these providers increases competition among banks, resulting in margin pressure and product quality improvements. Adjacent products are gaining traction. Dynamic discounting involves early payments from buyers in exchange for supplier-offered discounts on goods and services. Buyers’ excess cash or intermediary financing providers facilitate early payments. Technology providers (Tungsten and Kyriba) and fintech’s (Cash works) supply these products, integrating with banks’ payment infrastructure.
Wave 3: Convergence of Buyer and Supplier Solutions
The digitization of trade is underway. Scale and breadth are being achieved by digital procurement tools and electronic invoice platforms. E-commerce platforms are experiencing rapid growth, with integrated solutions being provided to facilitate easier buying and selling for companies. Advances in data and analytics are progressing rapidly. A “digital backbone” is being established, facilitating the convergence of buyer and supplier solutions. This convergence is creating opportunities for the third wave of growth in supply chain finance.
• Extending Financing Earlier in The Production Cycle
Financing can be extended earlier in the production cycle through the advanced analysis of buyer and supplier data. Tradable goods, in significant volumes, remain unfunded in ships or warehouses until buyer approval of the invoice. The utilization of predictive analytics, based on historical data, enables financing to be extended prior to invoice approval. The potential of this data is being investigated by banks, while specialist FinTech’s have developed analyticsdriven models to capitalize on this opportunity.
• Integration Of Financial and Non-Financial Solutions
1. As outlined in our previous paper, “Ecosystem thinking: why corporate banks need to adapt to survive,” an increasing convergence between financial and non-financial solutions is observed. The digital supply chain is at the heart of this convergence, as various players along the value chain, from sourcing through to fulfilment, are sought to be extended and new revenue streams captured.
2. A partnership has recently been formed between Ariba, a provider of procurement software, and Prime Revenue to offer financing solutions on an integrated platform. Trade Shift, a procurement platform, has been partnered with HSBC, Citi, and Santander to provide integrated financing solutions via apps. “One stop shop” solutions for international trade have been launched by Amazon and Alibaba, combining sourcing, shipping, and financing in one seamless process. These trends point to a third wave of opportunities for firms that can capitalize on their data advantages to develop new products and solutions. Growth will be driven as previously unmet financing needs are met and customer hassles are eliminated. For banks, a threat and an opportunity are presented, as non-banks – innovative FinTech’s, established “procureto-pay” providers, and e-commerce giants – seek to capture share.
Supply Chain Finance in Indian Banking Sectors
A crucial role in facilitating Supply Chain Finance is played by banks, which act as intermediaries providing the necessary financial services to suppliers and buyers. The buyers’ creditworthiness is assessed by banks, and a financing program is created based on their risk profile. Supply chain finance presents an attractive opportunity for banks to expand their services and deepen their relationships with corporate clients. The following benefits are offered by supply chain financing solutions provided by banks:
1. Revenue Streams are Diversified: Supply chain financing offers an alternative revenue stream, helping to mitigate risks associated with traditional lending products.
2. Credit Risks are Reduced: Financing is extended based on the creditworthiness of the buyer, reducing the credit risk for the financing institution, as the buyer’s credibility serves as collateral.
3. Corporate Clients are Supported: The financial health of a bank’s corporate clients is enhanced by supply chain financing, improving working capital management and easing cash flow challenges.
It is fairly evident that relatively few researchers have performed SCM in the service sectors and finance & banking, respectively. Most SCM practices have been conducted in the industrial industry. SCM in financial & banking organizations has been identified as requiring more investigation in the future. It has been predicted by research that bank-assisted transactions will become more common in future years. Corporations and governments in numerous nations have expressed a desire for banks to innovate more through supply chain solutions. Working capital management loans are provided by relationship banks to their major corporate clients. Supply chain financing is often handled by a commercial bank’s lending department. The performance of the supply chain management system depends on the flawless coordination of all supply chain stakeholders to achieve the desired results. It has been startlingly revealed that supply chain models are primarily developed by researchers for the purpose of enhancing company operations. In this illustration, the majority of financial-based supply chains have been depicted as a supportive driver of the manufacturing-based supply chain process. Furthermore, supply chain banking-based research has been found to be practically nonexistent in the academic community. However, despite being based solely on secondary data— a drawback of the paper—the findings of this study will open up new possibilities for substantial researchers to continue growth in the field of supply chain management and the supply chain finance and banking industry.
Interpretation
This decade’s research on Supply Chain Management (SCM) has been focused across a wide range of industries. Despite the growing popularity of SCM research and application, the definition of SCM remains a point of debate. SCM has been attempted to be accurately described in numerous ways by scholars and practitioners, with varying degrees of success. As a result, SCM has gained traction as a tried-and-true management method for long-term profitability and growth in various industries. The delivery of the correct amount, quality, and scheduling of goods and services to the right place at the right time is facilitated by focusing on all aspects of the supply chain management process. Supply chain management, which has become one of the most prominent ideas in the previous 30 years, is examined in this study. The progression of the development of this notion has been considered, with five major stages identified. The inception stage, referring to the notion of logistics first introduced in the 1950s, has been established. In the 1980s, the notion of supply chain management was developed, along with the idea of coordinating firms’ operations within the chain. The concept of focusing on end-customer needs and other forms of competition between chains, as well as between individual firms, was introduced in the 1990s, along with the separation of logistics from supply chain management and the reorganization of supply chain management as a whole. Several service industry domains have been examined from a chronological viewpoint in this article. Secondary data, such as digital libraries, Internet databases, journals, conference papers, and so on, have been used by the researcher to study SCM research articles from various angles. SCM has been evolved across various industries, including manufacturing and service, as well as its potential future applications. However, the study has been restricted since it is exploratory; more research is needed to quantify the impact. Given the nature of this exploratory research project and the enormous amount of qualitative data that needed to be collected, this approach has been deemed suitable. Nevertheless, an obvious need for further empirical research and quantitative analysis in this sector has been identified, which the authors are also interested in exploring. The development of the financial supply chain has also been explored by the authors. Furthermore, it has been discovered that little research is available regarding the banking supply chain, and a desire to continue investigating the financial supply chain in the banking sector has been expressed.
Conclusion
The business world has witnessed the emergence of supply chain financing as a transformative force, revolutionizing supply chain financial management. The ability to unlock working capital, reduce risks, and strengthen supply chain relationships is provided by supply chain financing, rendering it an essential tool for companies pursuing sustainable growth and success. The financial landscape is continually shaped by technological advancements, and supply chain financing is anticipated to undergo further development, driving economic prosperity in India and globally. A pathway to a more sustainable and prosperous future is created for businesses through the strategic utilization of this powerful financial instrument.
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