The Untapped Potential of Fintech in India’s Supply Chain

The Nascent Stage of Fintech Lending in India's Supply Chain

Despite a trading value exceeding USD 1 trillion in India’s downstream supply chain (brand to distributor to retailer), the lending disruption by new-age fintechs remains in its infancy. While a few players have scaled to hundreds of millions in AUM, their impact remains negligible compared to the total addressable market (TAM). This note explores the learnings and challenges in the current approach to fintech-driven lending.

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Challenges in Underwriting Retailers Through Distributors

1. Retailer Underwriting is Limited by Lack of Formal Data

Traditional distribution structures have benefited from data formalisation through Distribution Management Systems (DMS). However, similar ERP penetration between distributors and retailers is low, making it difficult for lenders to underwrite retailers based on alternative data. Cashflow-based lending using PoS systems is more established, but many fintechs face high dropout rates during basic checks like KYC due to insufficient data points on retailers.

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2. Retailers Shy Away from Working Capital-related Lending Products, Given the Equilibrium with Private Credit

Retailers put in limited capital from their end and rather rely on credit from distributors to rotate cash and make margins. A typical retailer may procure via 3 to 7 distributors and has a defined pecking order for repayment. For example, the marquee brand distributor is the biggest priority as they do not usually offer credit, and the branded inventory is supposed to drive footfall in the store. The retailers' approach is to take as much credit from the non-prioritised distributor and use the sale proceeds to fulfil this payment obligation toward the higher priority distributors. Distributors are well aware of this pattern from retailers and must constantly follow up and send payment reminders. However, basis the feedback from multiple conversations, distributors do usually get the payment, although with a delay of a couple of days. The intent of the retailer is not usually questioned. Given this scenario, a significant portion of the retailers opt not to go for formal lending products, given the ongoing arrangement with the distributors.

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3. Lemon and Peach Problem

Following up from the previous point, the kind of retailers who would be keen for the SCF options are usually the ones who suspect that delay in payment to the distributor may impact the dispatch of their next order or blacklist in the worst case. Therefore, a significant amount of pull for SCF products is with the lemon retailers and cases, which severely truncates the TAM. 

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The Challenge of Scaling via Distributors

Fintechs aim to leverage distributor networks to onboard retailers and expand their reach. However, varying levels of distributor adoption and geographic differences make scaling inefficient. Retailers may work with multiple distributors, but the fintech may not have uniform access to them across brands or regions. This geographical fragmentation limits operational leverage, as fintechs must rely on offline sales and collections, further straining resources.

Case Study: Retailer-First vs. Distributor-First Approaches

A retailer-first SCF player successfully landed large anchors but struggled with operational challenges in onboarding retailers. Expanding wallet share proved difficult due to fragmented data on retailer purchasing behaviours. In contrast, a distributor-first SCF player offering credit lines of up to Rs 2 crore saw greater success in providing working capital loans and term loans. This underscores the question: should fintechs target 12 million retailers or focus on XX distributors?

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Does SCF Unlock Higher Sales for Retailers?

While supply chain finance can improve capital flow for distributors, it doesn’t directly impact consumer demand. Retailers may see short- to medium-term sales boosts from improved inventory and operational efficiency, but this growth plateaus over time. For long-term growth, other stimulants—such as consumer lending or credit products—are needed to influence consumer demand.

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The Struggle for AUM Growth in Retailer-Focused Lending

1. Short Credit Cycles and Small Ticket Sizes

Retailer credit cycles range from 14 to 90 days, depending on the sector, with average purchases per brand between INR 5,000 and INR 30,000. This leads to low AUM growth despite fintechs maintaining low NPAs and strong collection efficiencies. Some fintechs have started offering term loans and insurance products to retailers, leveraging data on purchase patterns and repayment trends. However, these come with risks, as the use of funds is less clear, and competition is stronger in term loan products.

2. Distributor-Led Lending as a Solution

Financing distributors rather than retailers could solve some AUM challenges. Distributors often purchase directly from brands with large ticket sizes (INR 50L to INR 2Cr), accelerating AUM growth. Default rates are lower due to the fear of supply stoppages. Additionally, by accessing a distributor’s downstream retailer network, fintechs can offer secured credit products to retailers based on purchase and payment data.

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Niche Approaches and Sectoral Opportunities

Some fintechs are focusing on niche verticals like building materials and fast-moving electrical goods (FMEG). These B2B platforms, embedded with credit solutions, help regional mid-tier brands expand beyond their home territories. For example, regional players like Sudhakar Pipes (dominant in Andhra Pradesh and Telangana) and Pritam Electricals (dominant in Odisha and West Bengal) are offering better credit terms to distributors. This strategy helps them grow topline revenue and provides fintechs with a share of the profits.

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The Road Ahead for Supply Chain Financing

While there is potential for fintechs to disrupt the lending space in India’s supply chain, current challenges—such as limited data for retailer underwriting, operational inefficiencies, and low AUM growth—need to be addressed. Fintechs must carefully consider whether to target retailers or distributors and explore niche verticals where embedded credit solutions can create a meaningful impact.