SME - A BANKING PERSPECTIVE

BANK OF INDIA
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SMEs - Defined in Different Ways

Several Ways of Defining SMEs

Turnover Loan Size Investments in Capital Assets No. of Employees

Key Characteristics from Banking Perspective

Investments upto Rs. 1cr for SSIs upto Rs. 10 cr for MEs ? Turnover Rs. 50 cr to Rs. 75 cr ?

Definition for SMEs No definition is Ideal

Certain adopted basis for defining the so called Priority Sector may not be apt
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Cr o t s opr e a

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IN THE GIVEN CIRCUMSTANCES ASSETS/ INVESTMENT & TURN-OVER SEEM TO BE MOST ACCEPTABLE CRITERIA. TURN-OVER UPTO RS. 50 CRORES/ RS. 75 CRORES MAY BE KEPT AS THE BENCHMARK.

Definition is not the key issue from a Bankers Perspective

What Constitutes the SME Sector

It is rather difficult to define precisely as to what constitutes the SME sector, as
It covers a wide spectrum of activities ranging from manufacturing to trade to services. It involves different types of organizations with varying constitutions like proprietary concerns, partnership firms, private limited companies, public limited companies. Regulations/ Govt. Policy guidelines varies from activity to activity. It overlaps with the presently defined Priority Sector.
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What Constitutes the SME Sector ..

In the given scenario, it can be broadly said that the SME segment would include the following
Individuals Small & Partnership & as Medium Family owned Businessmen Sized Business Professionals Companies

Individuals

Larger Corporate Corporate Giants/ PSUs

Retail Segment

SME Segment
(Constitutionwise)

Wholesale / Corporate Segment

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Vital Role Played by SMEs in Economic Development

Largest employment provider (direct/ indirect). Fastest to adopt changes/ innovations. Makes use of the domestic resources for global benefits. Contributes to more than 1/3 of exports. Contributes to more than 1/3 of industrial output. NEEDS TO BE FOSTERED
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Challenges Faced by the SME Sector

Non-availability of adequate capital for investment . Difficulties in accessing the capital market. Inadequate institutional framework for assistance. Lack of technological advancement/ updation. Reluctance to change the way of functioning especially in family run concerns. Lack of opportunities to attract Foreign capital. Impact of / Threat posed by WTO. Terms dictated by the large Corporate on whom the SMEs depend. NEEDS TO BE REDRESSED FOR GROWTH
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SME Financing a Win-Win Situation for Banks

Better spreads on interest/ bundling of services for enhanced yield in relationship. Risk wide-spread. Banks are now better equipped to handle the varied needs of the SME sector due to better technology and Risk Management. Vast Scope for spin off of ancillary business. Less Complexities in extending Finance. All branches can handle the business - Limited specialization involved. FORMS THE CORE OF LENDING OPERATIONS 8

SMEs have been Heart Land of Public Sector Banks

Not Very Sophisticated Banking needs Personal Relationship with Branch Manager PSU Banks not considered Fair Weather Friends Only PSU Banks have had the reach to Finance Segment
MOST OF TODAYS LARGE CORPORATE CLIENTS HAVE BEEN NURTURED AS SME BY PSU BANKS
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Of Late, SME Segment has attracted a lot of attention

Margins
Increasingly higher pressure on margins in Corporate business Markets are becoming more easily accessible to Corporates Bundling Personal Banking with Commercial Banking makes SME high margin business Services driven economic growth - many SME emerging in services sector Technology allows cost effective service delivery platforms Call Centre, ATM, Internet Most Banks have upgraded their Risk Management System Better preparedness to manage NPA

Growth Better Risk Systems/ Technology

However, the SME Segment is unique and needs to be addressed on its own Terms

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Factors Inhibiting Banks in SME Financing

Sketchy data on the financial position. Insufficient/ lack of comparative data. Lack of Professional Management in Finance and Administration. Fortunes depend more on the individuals behind the business rather than business/ trade cycle/ behavior. Vulnerability of the small sized players globalize economy. Difficulties in effective monitoring of accounts/ capturing cash flows.
NEEDS TO BE TACKLED
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SMEs are not a Homogeneous Group

Require Different Products/ Services
Traders (W holesale &Retail) Manufacturers Services
Sm Ow all ners Exam ples Mom&Pop Stores all Sm Producers Cash 'n' Carry W holesale Manufacturers Traders Exam ples Exam ples Export LightIndustries Im porters Processing holesalers W Com panies

Retail Merchants
Exam ples Convenience Stores

Service Providers
Exam ples Agencies Consulting Services Personal Services Restaurants Travel &Tourism 12

Note: Segmentation includes operators/owners included in the scope of study; does not include construction and finance industry which was not studies

Approach has to be different from Corporate Clients

Risk Mgmt / Pricing
SM E le se Ru Ba d le d g n in / Scorin M d l g oe a d rd St n a P ricin g lla e l Co t ra b se a d a d rd St n a P d ct ro u s n le Bu d P rso a & e nl Co m rcia me l Ba k g n in ist u e D rib t d d liv ry e e t ro g m lt h u h u ich n e m d l a n l; o e Corporate d isk t g Cre itR Ra in ricin G id lin s g u e e P b se o RiskRa in a d n t g u e cip "Fo r Ey s Prin le st m d Cu o ise Solu ion St ct re t s/ ru u d Fin n a ce e lise Sp cia d p d ct solu ion ro u s/ t s

Product/ Service Offerings Service Delivery Structures

rg n e La eIFB Bra ch s or Cre itO n e d rie t d b n e inCit s ra ch s ie

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Based on Probability of default and loss given default (LGD)

Role of Banks for Developing the Sector

Should come out of the Asset based lending mind set. Cash Flow/ Collateral based lending models to be devised. Line of credit approach to be popularized. Simplified assessment/ appraisal models to be introduced (like 20% of the
turnover as working capital limits/ 75% of the project cost as Term Loan/ etc.).

Flexibility in lending policies- rigidities to be removed. Customized products including Factoring/ Forfeiting services, leasing facilities to be introduced. If necessary Special Purpose Vehicle to be promoted. Simplified Credit Rating modules to be introduced. Advisory Desks to be opened. Serve as a link between SMEs and Large Corporates through Channel Financing/ Vendor Chain Financing.

PROACTIVE APPROACH WARRANTED

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Unlike Corporates, A Wide Branch Network Required to Serve SME

A PSU Banks Branches with High SME Business in Mumbai

Branch with high Commercial loans & Current Accounts

Other branches

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NPAs Need to be Managed Aggressively

Poor Data & Systems Availability
P Insufficient data available on

the SME Companies

P Lack of Credible published

information about financial health

Leads to High NPAs and Lower Profitability than the Potential

To be Mitigated

P High Vulnerability of small

size players in liberalizing market Management Banks of Risk Systems in

P Inadequacy

Collection of authenticate data on the SME segment Educating the SMEs on the need for reliable financial data Rolling out suitable risk models for different segments & SMEs Close monitoring of the accounts Being supportive to their financial needs to avoid quick mortality

NPAs NEED TO BE MANAGED NEED NOT BE A DETERRING FACTOR 16

Institutional Framework
- From Protective to Promotional Approach
Formation of Credit Rating Agencies exclusively for SMEs. The ambit of Credit Guarantee Fund Trust for SSIs to be extended to cover the SME sector also. Mandated flow of information between Banks. CIBIL to act as Nodal Point. Special insurance products especially Keyman Insurance policies / Receivables insurance/ etc. Suitable framework for making available Venture Capital Funds. Creation of Data Bank (preferably by SIDBI) for authenticated information on different segments of the SME sector. Technology Bank to be established to impart the latest technology (Technological Bureau for Small Enterprises established in 1995 may be revived for this purpose). Involving NGOs, who have successful record in micro management for development of the tiny sector within SME. Introduction of tax/ other incentives. Framework for flow of FDI for SMEs to be in place. Encouraging other Intermediaries like NBFCs, etc.

SEVEN BANKS INCLUDING BOI ALREADY TIED UP WITH SIDBI FOR 17 VC FUNDS/ CREDIT RATING AGENCY/ GUARANTEE FUND

Cluster Approach
SME Business is Geographically Concentrated
Ahmedabad Aurangabad Bangalore Bhopal New Delhi Chandigarh Coimbatore Chennai Calcutta Cochin Hyderabad Auto & Auto compo. Hospitals Pharmaceuticals Travel & Tourism Note : Jaipur Lucknow Ludhiana Mumbai Nagpur Nashik Pune Surat Trivandrum Tirrupur Valsad Vadodara Gems & Jewellery Logistics Software Wearing apparel Mumbai Pune Ahmedabad Vadodara Jaipur Ludhiana New Delhi Lucknow Chandigarh

Bhopal Valsad Surat Nagpur Nashik Aurangabad Hyderabad Bangalore Chennai Coimbatore Tirrupur

Calcutta

Calicut Cochin

Trivandrum Some clusters such as Hospitals and Diagnostic centers, and Wholesalers are pan-India in nature. Locations with only these clusters do not 18 appear on the map Locations that are underlined not included in the top 50 centers Source: Market interviews; Analyst reports; Associations and directories; BCG analysis

Wholesale (Agriculture RM)

Cluster Approach ...

Cluster approach may be beneficial as Separate packages/ services can be developed for each cluster. Products/ services so developed implies that better yields can be realized. Authentic statistical/ market data for different units under the cluster can be collected which would help in formalizing locational specific Risk Management framework for the industry.
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Different Clusters have different Demands

Wearing Apparel Key products used Travel operators Logistics providers Pharmaceutical manufacturers

Packing credit Bill discounting Letters of Credit Business Guarantees Service level Response time

Current accounts Business Guarantees Forex remittances

Overdraft facility Forex remittance Cash Management Services Wide branch network High limits

Working capital limits Term loans

Key needs

Personalised service Simple procedures

Full range of offering Advisory services

NEED TO SERVE DIFFERENT CLUSTERS DIFFERENTLY20

Focussed Cluster Approach Beneficial

Growth & Profitability
Banks should develop packages suitable for different segments of customers Products and services designed to serve needs better implies that better premiums can be charged

Risk Management
There are no standard ways of managing the risk in SME bank needs to know the customers personally By focussing on a number of customers of one type in a cluster, the bank develops the insights by which a "good" customer can be differentiated from a "bad" customer

Banks can fortify their positions and This allows banks to manage the grow the business by knowing the credit risk of lending to SME customers well

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Expectations from SME Entrepreneurs

Professionalism in Management Transparency in Financial data. Better usage of technology. Flexible mindset to adopt to changing environments. Quality consciousness to suit global Standards.
BOTH HANDS NEED TO MEET TO CLAP
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At Bank of India, We are looking at a Specific Business Model for SMEs

Clearly defined Target Segments

Bank of India SME Model

Specific Delivery Model

Focussed Product & Service Offering 23

Conclusions
SME sector is the back bone of the economy especially in a developing country. What is required is the coming together of the Govt. Agencies, Regulators and Financing Agencies. Banks have to view lending to the SMEs as a profitable avenue rather than an avenue for forced lending. The paradigm shift in the lending operations of the Bank to SME sector is to be discerned and managed pragmatically/ proactively.
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Thank You

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