Asia owes a great deal of its economic rise during recent years to its large number of small and medium-size enterprises (SMEs). Unheralded though they may be, these firms account for as many as 95% of companies in many of the region’s economies, while typically generating more than half of GDP as well as providing the bulk of employment.
If SMEs are the lifeblood of Asia’s economic dynamism, tightening credit lending and a lack of access to capital markets for financing, means these firms need more support from their banks. For their part, governments play an important role through establishing benign regulatory environments and making available facilities such as positive credit reference agencies. But for many financial institutions, thin margins, lack of regional presence necessary to bank SMEs and perceived risk means banks either limit their SME services to loans, or they avoid the segment altogether. But banks are in a position to do much more, says Som Subroto, global head of SME banking at Standard Chartered.
“Throughout the banking industry, there is growing recognition that lending to SMEs is a crucial way for financial institutions to contribute to the real economy,” he said. And this does not mean just basic loans, but increasingly a full range of banking products and services to manage payments and cashflow more efficiently, maximise returns on spare capital, or to mitigate various forms of risks. In other words, banks need to cater to everything from payroll, payment collection, current accounts and debit cards to cross-border banking, investments, foreign exchange and derivatives – areas where many banks have not traditionally served SMEs well or indeed at all.
Of course, some SME banks have a stolen a march on competition. With strong local and regional networks they have already rolled out comprehensive SME banking services backed up by sophisticated technology platforms. “In the past, banks tended to offer the same products and services to SMEs, whether they were dealing with small businesses or medium-size enterprises. However, there is now more understanding that the requirements of the two segments are very different, with medium-size enterprises typically having a greater need for customised solutions going beyond basic banking,” said Subroto. “Small businesses, on the other hand, often lack capabilities to address issues such as tax and legal aspects. Banks can help by partnering with experts to offer them the advice that they need.”
This more holistic approach to SMEs means deeper relationships with SME clients, but even this can be taken further through supply chain financing. “Most SMEs are part of long chains of buyers and suppliers linked to large local or multinational companies,” said Subroto. “Traditionally, banks have not been proactive enough in supporting SMEs as part of these extended corporate families. But this is changing fast as more and more banks adopt innovative solutions to finance small companies as part of whole supply chains. By working with just a few corporate clients in this way, it is possible for banks to reach large numbers of SMEs.”
In India, for example, Standard Chartered has financed almost 3,000 SMEs based on relationships with a network of about 70 large anchor clients; the bank aims to replicate this model in a number of other markets, including China, Vietnam, Malaysia, Pakistan and Nigeria. “As more and more new technologies and approaches to serving SMEs become available to banks, the traditional notion that such customers are too risky to bank is slowly being turned on its head. With the right business model, the right mix of products and services and a ‘one bank’ holistic approach to delivery, financial institutions can – and do increasingly – bank SMEs profitably,” concluded Subroto.