Getting paid for the material they supplied to Bajaj Electricals Ltd was a cumbersome process for vendors. It involved several steps that included confirmation of delivery by Bajaj Electricals, raising of a physical bill of exchange by the supplier and submission of invoice and transport documents to Yes Bank Ltd, for payment.
This prompted the Bajaj Electricals management to explore a speedy and secure solution to replace its manual bill discounting process. The solution they hit upon was blockchain—the distributed ledger technology behind crypto-currencies such as Bitcoin. In January, the company announced going live on a blockchain-based vendor-financing (also known as supplier financing) solution developed by Yes Bank.
According to Chetan Bhanushali, general manager of treasury, Bajaj Electricals Ltd, the use of blockchain has eliminated the manual steps involved in the company’s bill discounting process and the entire transaction has become paperless.
“The details of invoices processed in Bajaj Electricals’ Oracle system get transferred to Yes Bank on blockchain, and then are discounted and funds are disbursed to the vendors of Bajaj Electricals. On the due date, the solution facilitates an automated debit from Bajaj Electricals’ account maintained with YES Bank,” Bhanushali explained.
After the implementation of blockchain, the entire process cycle for bill discounting at Bajaj Electricals has come down from four-five days to almost real time, according to Anup Purohit, chief information officer (CIO), Yes Bank, which partnered with IBM and a fintech start-up, Cateina Technologies, to develop the solution.
For the “smart contracts” used in the blockchain solution, Cateina has written the software code on top of Hyperledger—an open-source collaboration platform for developing and advancing cross-industry blockchain technologies. There are around 100 members of Hyperledger, and some of its members include Accenture, American Express, Fujitsu, Intel and IBM.
What Yes Bank has put in place is a “permissioned or closed-loop” blockchain in which there are a limited number of ledger nodes—four in the current Yes Bank solution—accessible to pre-registered and authenticated users of the smart contract (which, here, is a code-driven, tripartite agreement between Yes Bank, Bajaj Electricals and the supplier that has been onboarded for the blockchain). This is unlike how blockchain is used in regular Bitcoin networks wherein anyone who holds Bitcoins can transact with other Bitcoin holders or exchanges.
At the moment, Bajaj Electricals has brought one supplier onto the blockchain system. “We are now working towards making this full production basis the comfort we have on the solution so far,” said Bhanushali.
Explaining the rationale for choosing vendor financing for its first blockchain deployment, Purohit said, “We picked up supply chain financing because it is more aligned with blockchain and it’s beneficial to both the vendor and the bank.” Through the blockchain solution, Yes Bank gains by extending its reach to Bajaj Electricals’ suppliers to whom it can offer multiple financial services once it builds a relationship with them.
According to Bhanushali, Bajaj Electricals could have used Yes Bank’s application programming interface (API) services to send the invoice details to Yes Bank instead of using blockchain. However, in this process, the transactions are booked in the bank’s system and Bajaj Electricals would have to check the status of the transactions through mails. Hence, he chose blockchain, which has features “like security, distributed ledger accessible to concerned parties and the immutability feature—wherein transactions cannot be tampered with”, all of which “scored over API”.
Kannan Sivasubramanian, executive vice-president of global research and analytics firm Aranca, believes that blockchain can significantly impact vendor financing, both in terms of increasing process efficiencies and reducing costs.
However, there are certain limitations with the closed-loop blockchain implementations that Kannan highlighted by referring to the Yes Bank-Bajaj Electricals case. “We define closed-loop as a private network consisting of one company, one bank, and a set of suppliers. Here, in a way, a supplier is forced to discount his bills with a single bank. He might not be banking with the bank as a supplier or getting better rates elsewhere,” said Kannan.
Kannan added that if the Reserve Bank of India (RBI) or a nodal agency or, perhaps, even a private company could develop an open system that includes multiple vendors, suppliers and banks, then blockchain becomes a many-to-many relationship instead of the one-to-many that exists in a closed-loop. “An open blockchain based vendor financing system will be a real game changer in the Indian context, as the SME (small and medium-size enterprise) sector continues to be the major supplier of products and services to the corporate sector,” he said.
Yes Bank is cognizant of the limits of a closed-loop blockchain system and, according to Purohit, efforts are on to rope in other banks for greater participation. “I believe for the larger benefits of blockchain to be realised for the country, we need to move beyond the closed user group. If we want to set up an entire blockchain network in the country, then we need to partner with other banks, their customers, etc. I have spoken to the CIOs of a few banks and they are keen to look at it,” he said.
In India, Yes Bank is not alone in exploring and experimenting with blockchain for supplier finance. In November 2016, for instance, the Mahindra Group and IBM had announced they are co-developing a cloud-based blockchain application that has the potential to reinvent supply chain finance across India.
Meanwhile, the Institute for the Development and Research in Banking Technology, an establishment of RBI, recently brought out a white paper on blockchain technology so that banks and financial institutions in India could take a look and get ideas for their own blockchain journey going forward.