Several Ways of Defining SMEs Key Characteristics from Banking Perspective
Definition for SMEs – No definition is Ideal 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.
Certain adopted basis for defining the so called ‘Priority Sector’ may not be apt
“ Definition is not the key issue from a Banker’s 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.
In the given scenario, it can be broadly said that the SME segment would include the following Individuals Individuals as Businessmen Professionals Partnership & Family owned Business Small & Medium Sized Companies Larger Corporate Corporate Giants/ PSUs Retail Segment SME Segment (Constitutionwise) Wholesale / Corporate Segment What Constitutes the SME Sector ……..
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”
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”
SME Financing a Win-Win Situation for Banks
Better spreads on interest/ bundling of services for enhanced yield in relationship.
Bank’s 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”
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 TODAY’S LARGE CORPORATE CLIENTS HAVE BEEN NURTURED AS SME BY PSU BANKS”
Of Late, SME Segment has attracted a lot of attention
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
Margins Growth Better Risk Systems/ Technology “ However, the SME Segment is unique and needs to be addressed on its own Terms”
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”
SMEs are not a Homogeneous Group Require Different Products/ Services 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 Product/ Service Offerings Service Delivery Structures 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”
Unlike Corporates, A Wide Branch Network Required to Serve SME A PSU Bank’s Branches with High SME Business in Mumbai
Branch with high
& Current Accounts
NPA’s Need to be Managed Aggressively
Poor Data & Systems Availability
Insufficient data available on the SME Companies
Lack of Credible published information about financial health
High Vulnerability of small size players in liberalizing market
Inadequacy of Risk Management Systems in Bank’s
“ NPAs NEED TO BE MANAGED – NEED NOT BE A DETERRING FACTOR” Leads to High NPAs and Lower Profitability than the Potential To be Mitigated
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
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 VC FUNDS/ CREDIT RATING AGENCY/ GUARANTEE FUND”
SME Business is Geographically Concentrated
Trivandrum Wholesale (Agriculture RM) Ahmedabad Vadodara Valsad Aurangabad Bangalore Bhopal Calicut Chandigarh Chennai Cochin Coimbatore Hyderabad Jaipur Calcutta Lucknow Ludhiana Mumbai Nagpur Nashik New Delhi Pune Surat Tirrupur Valsad Vadodara Lucknow Nagpur Nashik Surat Trivandrum Pune Ludhiana Jaipur Mumbai Tirrupur Aurangabad Bhopal Chandigarh Cochin Hyderabad Ahmedabad New Delhi Bangalore Chennai Coimbatore Calcutta Travel & Tourism Software Hospitals Auto & Auto compo. Logistics Gems & Jewellery Pharmaceuticals Wearing apparel Note : Some clusters such as Hospitals and Diagnostic centers, and Wholesalers are pan-India in nature. Locations with only these clusters do not 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.
Different Clusters have different Demands Wearing Apparel
Bill discounting Letters of Credit
Cash Management Services
Wide branch network
Working capital limits
Full range of offering
Key products used Key needs “ NEED TO SERVE DIFFERENT CLUSTERS DIFFERENTLY ”
Focussed Cluster Approach Beneficial
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”
At Bank of India , We are looking at a Specific Business Model for SMEs Clearly defined Target Segments Focussed Product & Service Offering Specific Delivery Model Bank of India SME Model
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.