By : Gautam Jain, Chief Business Officer at Vivriti Capital
Chennai: 26th May 2025: The Indian auto industry is one of the key pillars of the economy due to its sheer size. It contributes roughly 7% to India’s GDP and provides direct and indirect employment to around 2 crore people. The industry is expected to grow at an annual rate of 8-9% by 2029. This growth reflects a healthy growth for auto components manufacturers as well. As per a report from the Automotive Component Manufacturers Association (ACMA), Indian automakers and suppliers are expected to infuse ~INR 58,000 crore over FY24-28 to boost localization of advanced components ranging from electric motors to automatic transmissions in order to cut reliance on Chinese imports. The auto ancillary industry in India accounts for ~2.5% of India’s GDP and the contribution is expected to more than double by 2026.
The domestic auto ancillary sector is highly fragmented and intensely competitive. Nearly 80% of the industry falls in the organized sector with domestic players supplying mainly to OEMs while the rest comprises unorganized sector supplying low-value-added products and meeting the replacement demand.
Industry Clusters
The Southern auto cluster, particularly Chennai and its surrounding belts such as Oragadam and Sriperumbudur, remains a critical nerve center for India’s auto ancillary industry. Often dubbed the ‘Detroit of India,’ Chennai accounts for over 30% of India’s automobile output and contributes to more than 40% of the country’s auto component exports (TIDCO, 2024).
Recent data from the Tamil Nadu Guidance Bureau indicates over ₹5,000 crore in committed investments across electric vehicle components and electronics manufacturing in 2024 alone, signaling a shift in demand patterns and increasing the financial strain on smaller ancillary players expected to scale rapidly.
In response, Chennai-based MSMEs have shown rising adoption of digital supply chain finance solutions, with NBFCs reporting a 20–25% YoY increase in disbursals through invoice discounting and anchor-led programs. However, awareness around formal mechanisms like TReDS remains low among Tier II/III suppliers, underscoring the need for deeper ecosystem education.
The auto ancillary units are generally located near OEMs because the latter seeks just-in-time procurement of raw materials, and the former aims to lower delivery costs. The Tier-I and II suppliers are generally located in the surrounding region of OEM’s plants whereas the unorganized players are scattered around the country.
Apart from Chennai there are other major clusters:
- North: Delhi–Gurugram (Manesar)–Faridabad
- West: Mumbai–Pune–Nasik–Aurangabad
- South: Bengaluru–Hosur
Some of the emerging auto hubs in India include Sri City, Anantapur (Andhra Pradesh), Sanand (Gujarat), etc.
Financing challenges faced by auto-ancillaries
Despite their significant presence and meaningful contribution to the economy, auto ancillary companies often face an alarming working capital gap due to extended payment cycles and delayed payments by OEMs as they mostly opt for credit sales. Such financial challenges can create supply chain disruptions, interrupt production schedules, and impact profitability. In such a scenario, Supply Chain Financing (SCF) can offer a unique solution to auto ancillary companies by ensuring a timely realization of liquidity.
How SCF comes into rescue with Bill Discounting Solution
SCF offers effective working capital solutions to mid-market auto ancillary companies by enabling early payment to their invoices. The solutions can be provided by banks, NBFCs, and Fintech companies. However, traditional lenders like banks are often reluctant to extend financing to new and small auto ancillary units in Tier 2/3 cities due to concerns of credit risk, insufficient knowledge about the company’s business model, and the relatively higher cost of servicing small loans. This is because such firms lack the credentials and credit history necessary to obtain traditional funding. In such a scenario, mid-market auto ancillary players often turn to NBFCs for SCF solutions as they offer more flexible and customized financing solutions, possess a deeper understanding of the supply chain, and are more responsive to the customized needs of these enterprises.
The auto ancillary companies can opt for a Bill Discounting (aka invoice discounting) solution under the vendor SCF program to mitigate their financial challenges and enhance operational efficiency. Unlike traditional financing, Bill Discounting solutions leverage the creditworthiness of large OEMs to offer low-cost financing at better terms, making it highly accessible and cost-effective for auto ancillary units. In the long term, it also makes way for such enterprises to obtain additional financing from traditional lenders due to better credibility in the loan market and the ability to grow their businesses sustainably.
The Purchase Bill Discounting (PBD) solution can be provided either on-balance sheet or off-balance sheet. Under on-balance sheet transactions, the SCF solution provider extends loans to domestic OEMs (Anchor) against the invoices raised by auto ancillary companies for the supply of components. This is most suitable in scenarios where Anchor’s payables cycle is not in sync with the invoice repayment period. On the other hand, under off-balance sheet arrangements, the SCF solution provides a loan directly to auto ancillary companies against the invoices raised by them on domestic OEMs (Anchor) ensuring timely realization of payments and optimizing their working capital management.
Further, unrated companies can improve access to financing by using their sales bills (or invoices) as instruments for drawing loans. This method helps them quickly convert their receivables into cash, improving their cash flow to meet operational needs.
As the auto ancillary sector continues to grow, adopting innovative financial solutions like PBD will be critical. As per industry estimates, the size of the invoice discounting ecosystem in the country stands at US$120 billion or ~INR 10 lakh crore per month. With the emergence of digital platforms (like RBI-backed TReDS), the industry is headed for a paradigm shift with both public sector and private sector units joining the ecosystem.