DLT in Supply Chain Financing, YES Bank's Pilot: An Analysis.

Introduction: DLTs

Distributed ledger technology (DLT), very fondly referred to as blockchain, has found many potential applications across industries since its entry to the mainstream business avenues almost two years ago. DLT has varied characteristics, each of which is being leveraged by specific use cases across industries. The digital identity use case leverages the cryptographic security, the record keeping use case leverages the ledger’s immutability while the audit use case leverages the ledger’s time stamping functionality. The aforementioned use cases invariably impact parts of businesses across verticals; however, fundamentally, DLT is nothing but a database technology which affects the application stack at the infrastructure level – a rather disruptive feature of the technology. This effectively sends impact ripples through an ecosystem horizontally, thereby bringing in its purview any and many participants of these ecosystems.

Why in Supply Chain?

Supply chain financing is one such market with participants spanning across industries, be it banks and NBFCs or large industries and SMEs in the role of supplier/vendor or manufacturer. The essence here is to achieve cost efficiencies by enabling interoperability amongst varied parties to a transaction, achieved through the deployment of a distributed ledger with some form of smart contracts embedding the business logic. The two key parameters here that drive cost efficiencies include the elimination of manual reconciliation of paper-based invoices and time efficiencies realized by eliminating to-and-fro movements of invoices among concerned parties.

YES Bank is one of India’s prominent financial institutions in the private sector, the bank has recently run a pilot on DLT based vendor financing with one of its corporate clients, Bajaj Electricals. The bank has partnered with FinTech startup Cateina Technologies to build a smart contract application on the Hyperledger blockchain. The bank has also partnered with IBM Bluemix to enable digital experience by means of virtual assistants for all the partners who access the DLT platform.

YES Bank Vendor Financing: Without Blockchain

Bajaj Electricals has had a long-standing banking relationship with YES Bank where the former runs its vendor financing program with the bank. A typical corporate client with YES Bank has a network of 40–50 vendors who supply parts/services to the company, the working capital for which is financed via the company’s relationship with YES bank. The legacy process begins with Bajaj Electricals raising a purchase order with the vendor; post this, the vendor raises a paper-based invoice which is manually filed with Bajaj’s ERP. Bajaj – after the first level of verification – sends this invoice to YES Bank for the second level of verification and finalization of terms including Bajaj’s credit limit, interest rate, terms of payments, etc. Finally, the payment is disbursed to the vendor. Throughout the process, the two parties involved – i.e., Bajaj and its vendors – have no way of tracking the status of the invoice. Additionally, the paper-based invoice changes hand multiple times introducing latency in the system.

YES Bank Vendor Financing: With Blockchain

The DLT-based pilot takes a different approach with respect to the means of delivery of information and data throughout the process flow. The purchase order created by Bajaj is paper-based, upon which the vendor creates a paper-based invoice which is manually logged in Bajaj’s ERP. At this point, YES Bank connects to Bajaj’s ERP via API and stores the invoice data on Hyperledger’s blockchain. This invoice data is worked upon by various departments within YES bank that perform checks and verifies terms on the digital invoice through smart contracts that embed business logic (here, terms of payment, interest rates, etc). Like in the previous case, the funds are disbursed to the vendor upon verification. YES Bank has created a web-based platform where the parties to the transaction, i.e., Bajaj, the vendor and YES Banks’ departments can track the invoice status in real time.

Conclusion: Cost Efficiencies

The DLT-based system effectively eliminates many pain points causing error-prone manual reconciliation and operational latencies; however, a full-fledged system would also enable end-to-end document digitization providing a completely paperless experience which would be in real time. The second aspect that generates cost efficiencies is the streamlining of YES Bank’s audit and regulatory reporting practices by leveraging DLT’s timestamping functionality, thereby enabling real-time reporting with minimal manual involvement. The bank claims that the new system achieves 60–70% cost efficiencies on cost per transaction for the bank based on an empirical analysis. Moreover, it also claims that the newer system achieves similar efficiencies for other players in the transaction. YES Bank’s DLT pilot can be seen as a small first step in the longer term initiative of digitization and interoperability among systems linked with the financial services industry, hopefully, one among many more to come.