INTEGRATED TRADE CREDIT RISK

& WORKING CAP

MANAGEMENT USING A
FINTECH APPROACH
BY
Sampath Kasirajan
For
ICI Projects I P Ltd
170718
TRADE INSURANCE SCENARIO IN INDIA
• India’s ratio of trade covered by credit insurance to GDP is around 5 per
cent compared to about 10 per cent for China and around 20 per cent in
some of major European economies
• India had imposed restrictions on credit insurance in 2010 in the wake of
large defaults on credit insurance policies issued by some state-owned
companies.
• “The $90 million premium for short term trade credit insurance in India is
just 0.0049 per cent of India’s GDP whereas the market potential is around
0.03 per cent of GDP or about $1 billion in premium in the next 10-15
years.
• “This will not happen unless there is a change in the regulations in India,”
GLOBAL GROWTH FOR TRADE CREDIT
INSURANCE
HOWEVER THINGS ARE CHANGING ON THE GROUND
• risk management technologies powered by ai are changing the capacity to
manage risk
• the industry is getting more organized, thanks to digitalization drive, global
practices and compliance standards especially in governance
• more businesses joining the formal economy
• introduction of GST
• increase in trade risk due to market volatility, disruptions, etc
• growing acceptance of b2b formats
• development of online tools and technologies
• growth in fintech solutions
• Growth of an enabling ecosystem for b2b trade
GLOBAL TRENDS IN B2B CREDIT SALES
IRDAI GUIDELINES
• Trade credit insurance means insurance of suppliers against the risk of non-payment of goods or
services by their buyers against non-payment as a result of insolvency.
• "A trade credit insurance policy shall not be issued to banks/ financiers/ lenders...
• An insurer shall necessarily assess the credit risk of any buyer who contributes more than 2 per
cent of the total turnover of the policyholder,"
• "A trade credit insurance policy can be sold to seller on whole credit turnover basis only, covering
all buyers.
• However, if the seller prefers to take credit insurance cover for a particular segment/product/or
country, the same shall be allowed provided the cover is taken for the whole credit turnover of all
buyers of that particular segment/ product or country," it said.
• Also, a trade credit policy should not grant an indemnity of more than 85 per cent of the trade
receivables from each buyer.
• Irdai also insurer should have internal risk management guidelines to assess "trade credit risk on
the buyer, giving credit limits on the buyer and buyer credit limit review".
THE B2B SCENARIO
 CHECK
Credit Limit
SALES, MARK INT, Credit Rating
CATALOGUING Performance Rating
Catalogue , Order and Existing Dues
Enquiry Management Terms matching

PRESENT PRODUCTS

FINTECH
CHECKS IF THERE IS INVENTORY,
EXECUTES IF THERE IS ENOUGH
Collaborative Integrated Sys

CHECK BUYER
PLACE ENQUIRY/ ORDER ONLINE
Credit Limits
Credit Rating
Performance Rating
Existing Dues
Terms
ONLINE TRADING Incoming Quality Level
SUPPLIER MOVES THE PLATFORM Passed, if failed, reject

PAYMENT TIMELINES
Alerts & Follow Up
INVOICE AND SHIPPING DOC RAISED

CREDIT PERIOD &

CONSIGNMENT
TO THE CENTRAL WAREHOUSE FULFILLMENT
Or SUPPLIES DIRECT
Consolidation &
Delivery Optimization

PAYMENT SYSTEM
PAYMENT SENT TO THE PAYMENT RELEASED
SHOP/MANUFACTURER AS PER SCHEDULE COMMITTED
Ledger Updates on a IF BREACHED
Daily Basis FOLLOW UP
BY FIELD FORCE
THE RISK SPECTRUM
THE PRIMARY RISK AREAS IN BUSINESS
THE RISK
SPECTRUM
Order Cancellation Risk
Transit Risk
Non Delivery Risk
Warranties Risk
Contract Repudiation
Credit Risk
Advance Payment Risk
Cover

ALSO AGAINST
Insolvency
Political Risk
Exchange Risk
Currency
Inconvertibility
 THE RISK ACROSS THE TRADING PARTNER’S SPECTRUM

BUY SIDE SUPPLY SIDE

Contract Repudiation Order Cancellation Risk
Warranties Risk Market Uncertainty Risks
Transit Risk Transit Risk
Non Delivery Risk Contract Repudiation
Advance Payment Risk Cover Credit Risk
Exchange Risk Insolvency
Market Uncertainty Risks –( Trend, Stock out , Exchange Risk
Write offs and Market Downs) Currency Inconvertibility

The risk here is being discussed for trade transactions

 Exchange Risk if any
91 91

Contract
Repudiation
Risk only if it
SUPPLIER

is a custom
order,
This risk
doesn’t exist Credit Risk
for off the
shelf
purchases
Placed for
Sale
Received into 5 15 18 23 90 Receivables
Account Custom Shipping Delay Risk
Production Transit Final Payment
0
Stock Out
Order Placed Delivery in Full on Risk
Time Risk Performance Warranty,
BUYER

Contract Repudiation &

Guarantee
Goods Received Market Risk
Reputational Risk

Transit Risk
Payment Advance
Advance Payment Risk This spectrum changes according to the business profile of the entity
TYPES OF IMPACT
• RISK IMPACTS AN ORGANIZATION IN SEVERAL AREAS
• Working Capital
• Margins
• Sustainability
• Returns
• Investments
• Cost of Capital
• Future mobilization of resources
RISK IMPACT AND PROBABILITY-
TRANSACTIONS ONLY
• The following slide is a heuristic evaluation of risk impact and
probability associated with transactions in an ecommerce
environment.
• This is not about evaluating the risk profile for a business as a whole
• Therefore, the risks identified are more to do with transactions than
business as a whole
• There is therefore a fit case to come up with a customized fintech tool
to manage this at transaction level with right set of Al and Machine
Learning technologies backed by predictive capabilities, trend and
pattern recognition
 IMPACT ON MANUFACTURING UNIT
WORKING CAP PROBABILITY MITIGATION
TRANSACTION LEVEL
No customer to enjoy
PAYMENT DEFAULT 15% more than 4% of the
total business
30%
Inbuilt internal hedges
MARGINAL DELAYS IN PAYMENTS to over market factors
Includes all inwards 45% Multilayered checks
with process driven
25% REDRESS RISKS systems at points
where the decisions
carry the highest of
TRANSPORTATION RISKS 5% risks
15%
Provision for Risk
5% ORDER CANCELLATION Premium
2%
Highly efficient Supply
15% Chain Network backed
3% by strong procurement
PRODUCTION RISKS
system
5% 5%
Maintenance of Risk
MARKET UNCERTAINTY RISKS Fund
25%
5% Advance for orders
…….
MANAGING AND MITIGATING
RISKS
COMPONENTS TO BE CONSIDERED- few examples
THE ORGANIZATIONAL STRUCTURE
When extending credit to a business of any size, effective B2b Credit Risk
Management is typically a primary concern. Credit professionals have
become adept at identifying many potential risks, but in the process may
unintentionally blind themselves to risks that would be otherwise obvious.
How does this happen? One possible answer: organizational structure

One can easily get blindsided when customer and sales relationships
operation in silos and it gets worse where sales through several divisional
funnels with no lateral visibility
BUYER’S & SUPPLIER’S EVALUATION
Dun and Bradstreet, does this evaluation on an yearly basis and it starts
with the process of issuing DUNS number.

This however, may not be feasible for small wholesalers whose turnover
may not be enough to support a protocol of this kind.

Be that as it may, this should be considered at some level to get an

indicative idea of the buyer’s credit rating

ACUITE Rating & Research Ltd ( formerly SMERA)

Acuité expects MSMEs and mid-corporates to mobilize around Rs. 6 lakh Cr. Of
additional debt over the next two years to meet their working capital as also
capex requirements
read more

CRISIL SME Ratings indicates the performance capability and

financial strength of Micro, Small and Medium Enterprises. The
entity-specific rating reflects the SME’s creditworthiness in
relation to other SME. The name of the rated entity is also published
in CRISIL SME Connect (A journal by CRISIL SME Ratings), reaching out
to all leading banks and financial institutions as well as over 1,10,000
SMEs.
RATING AND OPINION GATHERING

INSTITUTIONS OTHER OPTIONS

Dun and Bradstreet- Financial Evaluation Supplier’s Opinion
ACUITE – Formerly SMERA Credit Rating Trade Fraternity Opinion
CRISIL Rating Local Association Opinion
Bank Reference Public filings
SIDBI - Social Media Listening
NSIC – CARE Performance and Credit Customers Opinion
Rating for SSIs.
 CONTINUOUS AUDIT SYSTEM

It has to be Technology Driven powered by AI, Big data analytics and Machine Learning

Risks Data Parameters

Included covered set
 RISK ANALYTICS
APPLICATION OF AI, BIG DATA AND MACHINE LEARNING
Real Time actionable insights based on trends, patterns and analysis
Customer credit risk includes outright default and the universal risk of failure to pay in the expected
time. The credit manager’s job is to manage risk and collection activity effectively to meet the
corporation’s policies, risk parameters and cash needs. The Analytics we come up with for Working
Capital, Accounts Receivable and Credit Management should enable the company to gain actionable
insight into customer and portfolio risk, payment days risk, and working capital performance. It
should enable action-taking based on predictive analysis of current data.
KEY PARAMETERS – FEW EXAMPLES, (PLEASE CHECK FOR MORE IN THE
ANNEXURE SECTION)
Outstanding (uncovered ) per risk category
Overall Outstanding per Risk Category, Both covered and uncovered
Top 10 outstanding accounts (uncovered) per risk category, frequency of
appearance
Top 10 Outstanding Accounts ( both covered and uncovered) per risk
category
Alerts , peer level comparison, portfolio performance and index value
 SELECTION BACKED BY STRONG
DUE DILIGENCE PROTOCOLS

PARAMETERS PARAMETERS

BUYERS
SUPPLIER

MULTI LEVEL & MULTI AGENCY

DUE DILIGENCE

DUE DILIGENCE PROCESS

DUE DILIGENCE PROCESS APPROVED FOR TRADE
APPROVED FOR TRADE MEETS QUALIFYING
MEETS QUALIFYING PARAMETERS
PARAMETERS TRAINING IMPARTED
TRAINING IMPARTED
 ONBOARDING

BUYERS
SUPPIERS

UNDERTAKES TRAINING

INSTALL THE FINANCIAL TOOL

EXPLAIN THE FINANCIAL PROTOCOLS TO BE FOLLOWED
COMPLIANCES TO BE MET
PERFORMANCE METRICS TO BE ACHIEVED
DEGREE OF TRANSPARENCY TO BE MET
THE WORKING CAP SPECTRUM
 MAPPING OF SUPPLY SIDE CASH CYCLE
Payment Advance
FULL CASH TO CASH CYCLE
91 91
Internal Surplus Cash Accruals +
Institutional Funding

TRADE RECEIVABLES EXTENDED

INVENTORY RECEIVABLES
OR . BOTH
PRODUCTION

Received into 5 15 18 90 Additional Cash

Account Requirement
Final Payment
0
Custom Shipping Final Payment
Order Placed
Production Transit When staggered
INTEGRATE THE FOLLOWING FUNDING OPTIONS
Some are scale dependent and in a B2B environment, this scale will
give the platform wider options and access

Asset • Receivables
• Purchase Order finance
• Warehouse Receipts
Lending • Factoring

Alternative • Private Placements

• Corporate Bonds
• Covered Bonds

Debt • Securitized Debts

• Crowd Funding ( Debt)

Hybrid • Profit Sharing Rights

• Convertible Bonds
• Mezzanine Finance

instruments • Subordinated Loans and Bonds

• Silent Partici0pation

• Private Equity

Equity • Angel Investment

• Venture Capital
• Public Listing for SMEs
Instruments • Crowd Funding (Equity)
INTEGRATED TRADE FINANCE
AND CREDIT INSURANCE
 Trading Partner’s Banks Buyers

Individual Ledger
Credit Rating

Multi Vendor
Cluster Individual Ledger

Performance Reports
Credit Reports
Performance Rating Individual Ledger

PORTFOLIO APPROACH

Multi Vendor
Individual Ledger
Cluster

Individual Ledger

Performance Rating
 KEY ENABLERS TO DRIVE THE ONLINE & OFFLINE TRADING PROCESS

BUYER SOLVENCY TECHNOLOGY

(evaluation, Rating) (B2B )
Buyer onboarding process Credit Rating Model
Due Diligence AI , predictive Analysis and Machine
Credit Rating & Compliances learning
Continuous Monitoring
Follow IRDAI guidelines
FIELD OPERATIONS
ANALYTICS & INSIGHTS Territory Plan, Management and
(Digital, Social and Traditional) Financial Services
Informed Credit decision Trends and Market Shifts
Predictive Analytics Setting up of Terms
Credit Scoring, Probability of Default Payment Follow Up
Impact on Cash Flows Shipment Follow up
Clean Credit Translating into Loan access
and reduced interest
,

Strategic Partnerships CONTRACTUAL OBLIGATIONS

TRADE FINANCE & RISK Banks, NBFCs
MANAGEMENT Trade credit, Trade Insurance Order Management & Execution ,
Trade Finance Quality Inspection, Schedule
Working Capital Solutions Management, Shipping ,
Bill Receivables Management Transportation and Post Shipment
Redress & Risk Mitigation Management
Shipment Guarantees
ESCROW
DASHBOARD DRIVEN
OTHER STAKEHOLDERS

Suppliers Buyers

Access to a Dashboard Access to a Dashboard

Receivables History
payment history
Credit Limits set
Bills to be retired
Credit Rating
Financial Analytics
Overdue bills
Field Follow up reports
Financial Insights and Prognosis
Financial Discipline Rating
IMPLEMENTATION APPROACH
Discussions With Trade
Developing an
Associations and Developing B2B
appropriate Fintech
Wholesalers, Large platform for the
Solution and
Retailers & proposed environment
embedding it
Manufacturers

Discussion with
Designing an On boarding Suppliers
Financial & Rating
Engagement Model and Buyers
Systems

Workshops for the

Securing an Institutional Test with live
Traders under
Identity & backing transactions
Association
END OF DOCUMENT