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MicroSaveMarket-led solutions for financial services
MicroSaveMarket-led solutions for financial services
SME Finance: Opp...
MicroSaveMarket-led solutions for financial services
2
Agenda
Key Constraints Faced by Banks on SME
Finance
Key Constraint...
MicroSaveMarket-led solutions for financial services
3
Agenda
Key Constraints Faced by Banks on SME
Finance
Key Constraint...
MicroSaveMarket-led solutions for financial services
4
Challenges Faced by Banks on SME Finance
Appraisal
Origination
1st ...
MicroSaveMarket-led solutions for financial services
5
Agenda
Key Constraints Faced by Banks on SME
Finance
Key Constraint...
MicroSaveMarket-led solutions for financial services
6
Remote Loan Origination System (With Credit Scoring) (1)APPLICATION...
MicroSaveMarket-led solutions for financial services
7
Remote Loan Origination System (With Credit Scoring) (2)
Productivi...
MicroSaveMarket-led solutions for financial services
8
Remote Loan Origination System (With Credit Scoring) (3)
Design asp...
MicroSaveMarket-led solutions for financial services
9
Remote Loan Origination System (With Credit Scoring) (4)
MicroSaveMarket-led solutions for financial services
10
Agenda
Key Constraints Faced by Banks on SME
Finance
Key Constrain...
MicroSaveMarket-led solutions for financial services
11
Merchant Cash Advance : A Novel Lending Mechanism (1)
 Merchant c...
MicroSaveMarket-led solutions for financial services
12
Merchant Cash Advance : A Novel Lending Mechanism (2)
Eligibility ...
MicroSaveMarket-led solutions for financial services
13
Merchant Cash Advance : A Novel Lending Mechanism (3)
Differences
...
MicroSaveMarket-led solutions for financial services
14
Merchant Cash Advance : A Novel Lending Mechanism (4)
Usage of Mer...
MicroSaveMarket-led solutions for financial services
15
Agenda
Key Constraints Faced by Banks on SME
Finance
Key Constrain...
MicroSaveMarket-led solutions for financial services
16
Non Financial Services (1)
For banks, there is a new business prop...
MicroSaveMarket-led solutions for financial services
17
Non Financial Services (2)
NFS can be aimed at strengthening the f...
MicroSaveMarket-led solutions for financial services
18
Non Financial Services – Examples of Our Work (1)
We have develope...
MicroSaveMarket-led solutions for financial services
19
Non Financial Services – Examples of Our Work (2)
Video-based trai...
MicroSaveMarket-led solutions for financial services
20
Non Financial Services – Examples of Our Work (3)
MicroSaveMarket-led solutions for financial services
21
Agenda
Key Constraints Faced by Banks on SME
Finance
Key Constrain...
MicroSaveMarket-led solutions for financial services
22
Approach and Impact
Approach
 Segmentation – identification of ke...
MicroSaveMarket-led solutions for financial services
23
Sectors % of GDP Subsectors
Wholesale and
retail trade
11 Motor ve...
MicroSaveMarket-led solutions for financial services
24
19
54
84 93
109
129
143
162
176
200
235
0
50
100
150
200
250
300
C...
MicroSaveMarket-led solutions for financial services
25
Agenda
Key Constraints Faced by Banks on SME
Finance
Key Constrain...
MicroSaveMarket-led solutions for financial services
26
About MicroSave
About MicroSave
MicroSave is a global consulting f...
MicroSaveMarket-led solutions for financial services
27
SupplyDemand
Financial Institutions
Enterprises
InvestorsandDonors...
MicroSaveMarket-led solutions for financial services
28
Our Services
Financial
Solutions
Implementation
Support
SME
Financ...
MicroSaveMarket-led solutions for financial services
MicroSave Offices
Delhi Lucknow
Hyderabad
Manila
Jakarta
Kampala Nair...
MicroSaveMarket-led solutions for financial services
30
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SME Finance: Opportunities for Banks

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In this presentation, Anup Singh domain leader of SME Finance domain at MicroSave highlights the key opportunities for the banks in enhancing access to finance to SMEs and also retaining customers through provision of non-financial services. Amongst other things, the focus is on use of automation to enhance efficiency in the processes of SME finance, lower origination cost and reduce turnaround time in expanding access to finance to SMEs.

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SME Finance: Opportunities for Banks

  1. 1. MicroSaveMarket-led solutions for financial services MicroSaveMarket-led solutions for financial services SME Finance: Opportunities for Banks MicroSave May 2015
  2. 2. MicroSaveMarket-led solutions for financial services 2 Agenda Key Constraints Faced by Banks on SME Finance Key Constraints Faced by Banks on SME Finance Innovative Sales and Delivery Solutions Novel Ways to Lend to SMEs Business Development Services as Key Differentiator for Banks Business Development Services as Key Differentiator for Banks Case Study of Implementation of Advisory Services Case Study of Implementation of Advisory Services About MicroSave
  3. 3. MicroSaveMarket-led solutions for financial services 3 Agenda Key Constraints Faced by Banks on SME Finance Key Constraints Faced by Banks on SME Finance Innovative Sales and Delivery Solutions Novel Ways to Lend to SMEs Business Development Services as Key Differentiator for Banks Business Development Services as Key Differentiator for Banks Case Study of Implementation of Advisory Services Case Study of Implementation of Advisory Services About MicroSave
  4. 4. MicroSaveMarket-led solutions for financial services 4 Challenges Faced by Banks on SME Finance Appraisal Origination 1st Contact Recommendations Loan Committee Processing of documents Disbursement Repayment Monitoring Screening New Customer Identification Loan Appraisal Disbursement Loan Sanction MonitoringHow to select clients who have higher likelihood of on-time repayment? How to appraise prospective clients efficiently? How to enhance sync between sales and underwriting team? How to make post appraisal processes efficient? How to ensure regular monitoring of clients? Technology has the potential to enhance the efficiency and contribute to improve the portfolio quality
  5. 5. MicroSaveMarket-led solutions for financial services 5 Agenda Key Constraints Faced by Banks on SME Finance Key Constraints Faced by Banks on SME Finance Innovative Sales and Delivery Solutions Novel Ways to Lend to SMEs Business Development Services as Key Differentiator for Banks Business Development Services as Key Differentiator for Banks Case Study of Implementation of Advisory Services Case Study of Implementation of Advisory Services About MicroSave
  6. 6. MicroSaveMarket-led solutions for financial services 6 Remote Loan Origination System (With Credit Scoring) (1)APPLICATION PRE- SCREENING APPRAISALSANCTION Credit Officer Visits customers with a tab Visits customers with a tab Fills application Fills application Takes images of KYC documents Takes images of KYC documents Generates credit bureau reports Generates credit bureau reports Integrated with credit bureau to automate credit bureau reports in the application Credit Scoring Module Checks with list of existing and rejected client Checks with list of existing and rejected client Assesses profileAssesses profile Advises Credit Officer if the client profile is suitable Advises Credit Officer if the client profile is suitable Client can either be rejected, asked for more information or selected for credit appraisal Credit Team View all data captured View all data captured Visits clients with tab Visits clients with tab Appraises the client Appraises the client Collects all the data from the client Collects all the data from the client Paper less system, print out can be taken at any stage for required signatures Sanctioning Authority View application and appraisal View application and appraisal Approve or reject loan Approve or reject loan Set sanction terms Set sanction terms Inform client automatically on SMS/IVR Inform client automatically on SMS/IVR Paper less system, print out can be taken at any stage for required signatures Source: Artoo Analysis
  7. 7. MicroSaveMarket-led solutions for financial services 7 Remote Loan Origination System (With Credit Scoring) (2) Productivity Efficiency Origination Portfolio quality Productivity up by 51% Error reduction by 70% Automation reduces data entry time by 50% Processes 1.5x as many loans. Enables low- caliber field staff to perform high- quality work TAT down by 75% as a result Real-time data availability & fewer iterations TAT is key differentiator in customer’s minds. Borrower gets loan on time and doesn’t resort to additional borrowings. Origination cost per customer goes down by 60% Improved productivity at all levels Elimination of costs such as courier & data entry vendor Profitability, scope of delivery of loans at lower interest rate Portfolio quality increases considerably Chances of selection of bad clients reduces significantly BENEFITS Source: Artoo Analysis
  8. 8. MicroSaveMarket-led solutions for financial services 8 Remote Loan Origination System (With Credit Scoring) (3) Design aspects: The credit scoring tool can either be designed as expert, statistical, or statistical integrated to psychometric tools Borrower Business Primary Source of Repayment Alternate Sources of Repayment Attributes Industry; Property ownerships; Level of formalisation; and Purpose of loan (for majority of the loan amount) Debt Service Coverage Ratio Alternate verifiable sources of income compared to instalment; Collateral coverage; Experience of borrower; Credit history; Savings history (Six-month average versus the loan amount); and Credit Bureau history All the attributes above are rated on the scale of 5 and a composite weighted score is calculated to determine the risk score of a prospective client. Example of Expert Credit Scoring Tool:
  9. 9. MicroSaveMarket-led solutions for financial services 9 Remote Loan Origination System (With Credit Scoring) (4)
  10. 10. MicroSaveMarket-led solutions for financial services 10 Agenda Key Constraints Faced by Banks on SME Finance Key Constraints Faced by Banks on SME Finance Innovative Sales and Delivery Solutions Novel Ways to Lend to SMEs Business Development Services as Key Differentiator for Banks Business Development Services as Key Differentiator for Banks Case Study of Implementation of Advisory Services Case Study of Implementation of Advisory Services About MicroSave
  11. 11. MicroSaveMarket-led solutions for financial services 11 Merchant Cash Advance : A Novel Lending Mechanism (1)  Merchant cash advance is a point-of-sales (POS) based loan product for merchants offered for a fixed tenure (usually less than 24 months) to meet the working capital requirements.  Unlike working capital products of banks, it is an advance to a business in exchange for an agreed upon percentage (withholding limit) of future credit card and/or debit card sales. The loan, payable daily, deducted from the sales at the point-of-sales device itself, unburdens the SMEs from the rigour of bulky monthly repayments.  Applies as well to a wider spectrum of future receivables, revenue and receivables factoring. The target segment for this product includes the small and medium sized retailers.  The unique features of this loan programme are the easy procedures of underwriting and less paperwork backed by robust systems at the back end including the use of credit scoring tools.
  12. 12. MicroSaveMarket-led solutions for financial services 12 Merchant Cash Advance : A Novel Lending Mechanism (2) Eligibility is determined based on the average card sales and/or overall sales over a period of time say 1-2 years An agreement is reached between the FI and the entrepreneur on the withholding limit that determines the tenure Advance is provided to the entrepreneurs usually in 36-48 hours after the application FI replaces POS machine with its own, the daily sales comes to the FI first from which they pay the amount to entrepreneur after deducting the withholding Eligibility determination and monitoring is based on: Card Sales Settlement Days Chunkiness Index Seasonality Impact Segment
  13. 13. MicroSaveMarket-led solutions for financial services 13 Merchant Cash Advance : A Novel Lending Mechanism (3) Differences Merchant Cash Advance • Dependent on sales volume • Easy application • No collateral • Approved in 36-48 hours • No fixed payment • Daily repayment • Minimal documentation • No penalties on late payment Bank Loan • Dependent on cash flows and credit appraisal • Collateral required • TAT: 1-4 weeks • Fixed payment • Usually month payment • Cumbersome documentation • Late payment penalties
  14. 14. MicroSaveMarket-led solutions for financial services 14 Merchant Cash Advance : A Novel Lending Mechanism (4) Usage of Merchant Cash Advances Additional Working Capital 50% Inventory 9% Tools & Equipments 8% Office/Premises Upgrade 8% Expansion 7% Tax &/or Loan Payments 6% Marketing & Advertising 4% Salaries & Wages 4% Research & Development 3% Others 1% Source: Merchant Cash Advance Usage Analysis
  15. 15. MicroSaveMarket-led solutions for financial services 15 Agenda Key Constraints Faced by Banks on SME Finance Key Constraints Faced by Banks on SME Finance Innovative Sales and Delivery Solutions Novel Ways to Lend to SMEs Business Development Services as Key Differentiator for Banks Business Development Services as Key Differentiator for Banks Case Study of Implementation of Advisory Services Case Study of Implementation of Advisory Services About MicroSave
  16. 16. MicroSaveMarket-led solutions for financial services 16 Non Financial Services (1) For banks, there is a new business proposition and value in providing non- financial services (NFS) to their SME customers in order to: Enhance client loyalty Expand portfolio reach Gain competitive advantage Profit from the client’s loyalty and continued association with the bank
  17. 17. MicroSaveMarket-led solutions for financial services 17 Non Financial Services (2) NFS can be aimed at strengthening the financial management, market knowledge awareness, fund raising, and productivity of their SME customers. The key issue is identifying what will work in this market and what can achieve scale. Some of the NFS examples are: (a)Setting up and managing an SME Business Club (b)Sponsoring a TV show (c)Delivering training to SMEs (d)Setting up an internet platform for SMEs (e)Sponsoring the Entrepreneur of the Year contest (f)Developing a women focused approach (g)Offering sector specific services (e.g. Agribusinesses)
  18. 18. MicroSaveMarket-led solutions for financial services 18 Non Financial Services – Examples of Our Work (1) We have developed customised NFS products for the markets in which the banks operate. Some of our SME training toolkits include:  Financial Management  Accounting  Business Planning  HR Management  Costing and Pricing  General Administration  Logistics Management  Expanding to international markets  Risk Management  Debt Finance  Presenting your business to bankers and investors  Technology  E-Commerce
  19. 19. MicroSaveMarket-led solutions for financial services 19 Non Financial Services – Examples of Our Work (2) Video-based trainings to SMEs: Delivered through the credit officers carrying tabs 3-5 minutes videos Use of animations to allow use of any language Delivered every monitoring visit (usually once a month) Feedback from banks: Follow-up interviews show that most customers retained the lessons in the video, resulting in a better understanding of managing their businesses well. The unexpected finding from the interviews was that the video left a very good impression of the firm as a whole. The professional looking video increased the trust in firm’s capabilities, which further analysis could find led to customer word of mouth marketing and repeat customer.
  20. 20. MicroSaveMarket-led solutions for financial services 20 Non Financial Services – Examples of Our Work (3)
  21. 21. MicroSaveMarket-led solutions for financial services 21 Agenda Key Constraints Faced by Banks on SME Finance Key Constraints Faced by Banks on SME Finance Innovative Sales and Delivery Solutions Novel Ways to Lend to SMEs Business Development Services as Key Differentiator for Banks Business Development Services as Key Differentiator for Banks Case Study of Implementation of Advisory Services Case Study of Implementation of Advisory Services About MicroSave
  22. 22. MicroSaveMarket-led solutions for financial services 22 Approach and Impact Approach  Segmentation – identification of key segments  Market research – needs assessment for financial products/services for SMEs  Products designed based on needs assessment - for segments/types of  Credit scoring tool - cloud based to screen clients based on risk  Risk pricing mechanism – higher risk translates to higher rate of interest  Institutional capacity strengthening – modified processes, optimised systems, training of staff (emphasis on field-based training)  Marketing collateral design Impact of introducing new products Retention Expansion  Retain existing clients  Avoid losing existing clients tempted to drop out because unsatisfied with credit methodology. These clients are key to any FI since they usually present higher margin  Acquire new customers who are growth-oriented and are foreseeing a “business expansion” or higher value loan after a few loan cycles
  23. 23. MicroSaveMarket-led solutions for financial services 23 Sectors % of GDP Subsectors Wholesale and retail trade 11 Motor vehicle and motor cycle Food, Beverages and Tobacco Housing goods, clothes, footwear and leather articles Machine, equipment and supplies Transportation 4 Other land transport Warehousing and storage Administrative and other support services 3 Travel agency, tour operator Security agencies and support Other service activities, washing, dry cleaning, hair dressing etc. Education 3 Private sector educational institutions Manufacturing 2 Food processing - meat and fish; fruits and vegetables; vegetable and animal oils and fats; dairy products; grain mill and starch products, other food products; and prepared animal feed Beverages - soft drinks and bottled waters Furniture and others Hotels and restaurant 2 Accommodation services Food and beverage service Health 1 Private hospitals Pharmacies and related Livestock 2 Animal production Segmentation - Outcome
  24. 24. MicroSaveMarket-led solutions for financial services 24 19 54 84 93 109 129 143 162 176 200 235 0 50 100 150 200 250 300 Client Results 104 338 496 577 693 917 980 1,221 1,339 1,451 1,657 - 500 1,000 1,500 2,000 2,500 Thousands Portfolio (USD) - 50,000 100,000 150,000 200,000 250,000 300,000 Disbursement (in USD) - 5,000 10,000 15,000 20,000 25,000 Average Loan Outstanding (in USD)
  25. 25. MicroSaveMarket-led solutions for financial services 25 Agenda Key Constraints Faced by Banks on SME Finance Key Constraints Faced by Banks on SME Finance Innovative Sales and Delivery Solutions Novel Ways to Lend to SMEs Business Development Services as Key Differentiator for Banks Business Development Services as Key Differentiator for Banks Case Study of Implementation of Advisory Services Case Study of Implementation of Advisory Services About MicroSave
  26. 26. MicroSaveMarket-led solutions for financial services 26 About MicroSave About MicroSave MicroSave is a global consulting firm committed to promoting financial access and responsible finance amongst low-and middle-income populations. We lead and support the provision of high-quality, affordable, market-led financial services. SME Finance domain at MicroSave supports promising interventions in SME sector through project design and implementation around strategic, financial and operational solutions development. Mission Statement of SME Finance Domain We support growth and success of small and medium enterprises through:  Assisting financial institutions to deliver high-quality, market-led financial and non-financial services to enterprises  Strengthening capacities of enterprises and enterprise financing institutions by business process re-engineering of front end sales and marketing processes and back end process including information technology, HR, accounting and finance  Championing the effective use of investments and technical assistance funds of donors and policy makers towards enhanced access to finance and other non- financial services to enterprises
  27. 27. MicroSaveMarket-led solutions for financial services 27 SupplyDemand Financial Institutions Enterprises InvestorsandDonors Due-diligence and assessments Capital advisory services Technical assistance to investee FIs in SME Strategy, business model and tactical plan Product design, marketing and sales - plan Organisational strengthening and risk management Enterprise assessment Non financial services Institutional strengthening SME FINANCE DOMAIN Our Services Monitoring and Evaluation
  28. 28. MicroSaveMarket-led solutions for financial services 28 Our Services Financial Solutions Implementation Support SME Finance Domain Market scoping and qualitative/quantitative market research exercise Target segment identification and definition terms of the profile, segment and scope across geographies Strategic planning – intervention strategy design for SME finance Business and financial projections Market identification, definition and segmentation Strategic Development Design, pilot test and roll out of market-led financial products Deep dive insights of the market through qualitative client research Market research and financial product design Credit scoring, risk assessment and appraisal framework Delivery channel optimisation Training needs assessment, curriculum design and delivery to SME finance staff and SME clients Marketing plan design and implementation SMEs set up effective policies and procedures and the necessary processes in place Business development services and skill development of SMEs
  29. 29. MicroSaveMarket-led solutions for financial services MicroSave Offices Delhi Lucknow Hyderabad Manila Jakarta Kampala Nairobi Port Moresby MicroSave (India, Head Office) Head Office: Lucknow Tel: +91-522-2335734 Fax: +91-522-4063773 New Delhi Office: Tel: +91-011-45108373 Hyderabad Office: Tel: +91- 40-23386140 info@MicroSave.net MicroSave (Kenya Office) Shelter Afrique House, Mamlaka Road, P.O. Box 76436, Yaya 00508, Nairobi, Kenya. Tel: +254-20- 2724801/2724806 Fax: +254-20-2720133 Mobile: +254-0733-713380 info@MicroSave.net MicroSave (Uganda Office) Regency Apartments 30 Lugogo By-Pass P.O. Box 25803 Kampala, Uganda. Tel. +256 312 260 225 Mobile. +256 776 36 5536 info@MicroSave.net MicroSave (UK Office) The Folly, Watledge Close, Tewkesbury, Gloucestershire GL20 5RJ UK Tel. +44 1684 273729 Mobile +44 796 307 7479 info@MicroSave.ne MicroSave (Manila Office) Unit 402, Manila Luxury Condominiums, Pearl Drive corner Gold Loop, Ortigas Center, Pasig City, Metro Manila, Philippines. Tel: +(632) 477-5740 Mobile: +63-917-597- 7789 info@MicroSave.net MicroSave (Indonesia Office) Jl. Penjernihan I No. 10, Komplek Keuangan - Pejompongan, Jakarta Pusat 10210, Indonesia. Tel: +62 82122 565594 info@MicroSave.net MicroSave (PNG Office) Corner of Musgrave Street and Champion Parade, Port Moresby, Papua New Guinea. TeleFax No.: +675 321 8823/321 8854 info@MicroSave.net Tewkesbury Buenos Aires 29
  30. 30. MicroSaveMarket-led solutions for financial services 30 Thank you
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In this presentation, Anup Singh domain leader of SME Finance domain at MicroSave highlights the key opportunities for the banks in enhancing access to finance to SMEs and also retaining customers through provision of non-financial services. Amongst other things, the focus is on use of automation to enhance efficiency in the processes of SME finance, lower origination cost and reduce turnaround time in expanding access to finance to SMEs.

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