Is DLT the answer to the recovery of micro, small and medium enterprises?
From supply chain woes to healthy trade to MSME financing, Infosys Finacle's Maiya explains how DLT can speed up recovery
From supply chain woes to healthy trade to MSME financing, Infosys Finacle's Maiya explains how DLT can speed up recovery
As world trade prepares to stabilise and recover post-pandemic, it is important to note the current economic downturn is a direct result of the health crisis rather than one driven by structural weakness.
Industry experts, therefore, believe recovery to pre-Covid conditions will be faster than before but not straightforward.
Unprecedented and frequent supply chain disruptions have been a big challenge in the recent past. The semiconductor shortage, China’s power supply challenges, global labour shortages, and the food and crude oil shortages caused by the Russia-Ukraine conflict, are just some examples of supply chain breakdowns that have deeply impacted trade over the past few years.
Supply chain challenges, particularly friction in trade and trade financing transactions, are not new. Since 2001, the World Trade Organisation has been cognizant of the need to address this impediment to growth in developing economies. However, any attempts to reduce this friction in trade processes have been too minor to make a dent.
Supply chain players are part of a complex ecosystem, which encompasses more than just the buyer and seller. There are too many processes involving various providers for banking, shipping lines, warehousing, logistics, customs, audits, and regulations that continue to generate heaps of paperwork with long turnaround times that are both time-consuming and costly. In a world that expects fully digital transactions, without friction, and in real-time, these issues pose an even greater challenge.
Even a straightforward process like opening a letter of credit (LC) to finance the import of goods, can run into weeks. Points of friction may be ecosystem participants disagreeing on streamlining to a standard set of documents, lack of visibility into processes, or other difficulties in managing the banking supply chain and trade ecosystem.
In this scenario, the digital backbone provided by emerging technologies can help to boost healthy international and domestic trade. Distributed ledger technology (DLT) is expected to be a major enabler as the global economy rebounds and recovers.
DLT automates not only within an organisation, but also at inter-organisation, inter-country, and multi-country levels. The scale at which it transforms is therefore massive; moving into streamlined, paperless, frictionless, cost-effective, and faster operations at all supply chain links.
DLT gets ecosystem participants on to a common, decentralised platform. Participants have fuller visibility of processes and can easily track the status of every transaction.
The distributed ledger is immutable, which means its fully digital contents are held in a highly secure and confidential manner. Participants can transact with zero risk of loss, theft, or unauthorised access. Enabling this kind of trust will be a tectonic shift in a world plagued by friction and insecurity.
As a case in point, consider the badly hit micro, small and medium enterprises (MSME) segment. Touted as the engines of economic growth and job creation, they are struggling to recover as they face an awning trade financing gap upwards of US$ 5.2 trillion.
With financial inclusion gathering steam, in countries like India, MSME financing backed by government initiatives is expected to take off just the way UPI-based digital payments did. This will be just in time for MSMEs to reap the benefits of India’s Open Network for Digital Commerce that promises to democratise digital commerce and bring at least a hundred million small businesses into the fold. Here DLT solutions for trade solutions based on blockchain or other distributed ledgers can be used by the business to scale to any desired level and explore a wider expanse of opportunities than ever.
For example, DLT was implemented as a pilot for issuing inland letters of credit. The results were truly remarkable as the turnaround time was reduced by 75%. In addition, it drastically reduced paperwork and costs. MSMEs, backed by such streamlined and efficient operations, will find it easier to approach and attract investors.
On the other side of the spectrum, industry experts emphasise the need for banks to cooperate with governments in ensuring financial access to more small businesses and help them contribute to the economy.
Through the DLT platforms, banks will have a convenient and affordable means to acquire and engage corporate customers proactively. The smart contracts enabled by DLT means banks can do away with the cumbersome paper-based contract format. Instead, they use a secure digital format and a distributed network wherein all digitized bills are scanned and verified before being processed for payment.
Gartner expects the business value generated by blockchain to climb to $3.1 trillion by 2030. This is not surprising as DLT is quickly becoming a safe bet for participants across the trade ecosystem. Secure by design, easy to deploy and scale, it is proving to be quite easy on the pocket too.
For more information on Infosys Finacle’s own digital banking platform, click here.
