SME - A BANKING PERSPECTIVE
BANK OF INDIA
SMEs - Defined in Different Ways
• Loan Size
SMEs • Investments in Capital Assets
• No. of Employees
Key Characteristics Investments – upto Rs. 1cr for SSIs
from Banking upto Rs. 10 cr for MEs ?
Perspective 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
Basis for Basic Drawback from Banks perspective
Assets / Capital Differs from activity to activity.
Investments Employed Manufacturing activity requires larger
amounts where as trading/ service warrants
Limits with Easy to In view of multiple finance; even big Corporates
individual Capture borrow from different Banks/ institutions many
Banks times in smaller quantities
No. of Indication of Does not directly co-relate with Banking needs.
Size In some activities even small Companies have
Turnover determines huge turn over like Corporates.
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 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
– It overlaps with the presently defined Priority Sector.
What Constitutes the SME Sector ……..
In the given scenario, it can be broadly said that the
SME segment would include the following
Individuals Small &
as Medium Larger Corporate
Individuals Family owned
Businessmen Sized Corporate Giants/ PSUs
Retail Wholesale /
Vital Role Played by SMEs in Economic
Largest employment provider (direct/ indirect).
Fastest to adopt changes/ innovations.
Makes use of the domestic resources for global
Contributes to more than 1/3 of exports.
Contributes to more than 1/3 of industrial
“NEEDS TO BE FOSTERED” 6
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
“NEEDS TO BE REDRESSED FOR GROWTH” 7
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
Vast Scope for spin off of ancillary business.
Less Complexities in extending Finance.
All branches can handle the business - Limited
“FORMS THE CORE OF LENDING OPERATIONS” 8
SMEs have been “Heart Land” of Public
Not Very Sophisticated Banking needs
Personal Relationship with Branch Manager
PSU Banks not considered “Fair Weather
Only PSU Banks have had the reach to Finance
“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
– Markets are becoming more easily accessible to
Bundling Personal Banking with Commercial Banking
makes SME high margin business
Services driven economic growth - many SME emerging in
Growth 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
“However, the SME Segment is unique and needs to be 10
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
Fortunes depend more on the individuals behind the
business rather than business/ trade cycle/ behavior.
Vulnerability of the small sized players globalize
Difficulties in effective monitoring of accounts/
capturing cash flows.
“NEEDS TO BE TACKLED” 11
SMEs are not a Homogeneous Group
Require Different Products/ Services
Traders (Wholesale & Retail) Manufacturers Services
om & Pop Stores
Cash 'n' Carry
Retail Merchants Wholesale Manufacturers Service Providers
Examples Examples Examples Examples
Convenience Export- Light Industries Agencies
Stores Importers Processing Consulting
Wholesalers Companies Services
Travel & Tourism12
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
Rule Based Credit Risk Rating
lending/ Pricing Guidelines
Risk Mgmt Scoring Model based on Risk Rating
/ Pricing Standard "Four Eyes Principle
based Solutions/ Structured
Product/ Standard Finance
Service Bundle products/ solutions
Offerings Personal &
Distributed Large IFB Branches
Service delivery or Credit Oriented
Delivery through multi- branches in Cities
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/
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
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” 14
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
• Other branches
NPA‟s Need to be Managed Aggressively
Poor Data & Systems Availability
Insufficient data available on Leads to High
the SME Companies NPAs and Lower
Lack of Credible published Profitability
information about financial than the
High Vulnerability of small
size players in liberalizing
• Collection of authenticate data on the SME segment
• Educating the SMEs on the need for reliable
Inadequacy of Risk financial data
Management Systems in • Rolling out suitable risk models for different
segments & SMEs
• Close monitoring of the accounts
• Being supportive to their financial needs to avoid
“NPAs NEED TO BE MANAGED – NEED NOT BE A DETERRING FACTOR” 16
- 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
Mandated flow of information between Banks. CIBIL to act as Nodal Point.
Special insurance products especially Keyman Insurance policies / Receivables
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 FOR17
VC FUNDS/ CREDIT RATING AGENCY/ GUARANTEE FUND”
SME Business is Geographically Concentrated
Nagpur New Delhi
Chennai Ahmedabad Bhopal Calcutta
Calcutta Tirrupur Surat Nagpur
Cochin Valsad Mumbai Nashik
Auto & Auto compo. Gems & Jewellery
Travel & Tourism Wearing apparel
Wholesale (Agriculture RM)
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
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 Logistics Pharmaceutical
Apparel providers manufacturers
Key • Packing • Current • Overdraft • Working
products credit accounts facility capital
used • Bill • Business • Forex limits
discounting Guarantees remittance • Term loans
Letters of • Forex • Cash
Credit remittances Management
• Business Services
• Full range
Key • Service level • Personalised • Wide branch of offering
needs • Response service network • Advisory
time • Simple • High limits services
“NEED TO SERVE DIFFERENT CLUSTERS DIFFERENTLY”20
Focussed Cluster Approach Beneficial
Growth & Profitability Risk Management
Banks should develop packages There are no standard ways of
suitable for different segments of managing the risk in SME – bank
customers needs to know the customers
Products and services designed to By focussing on a number of
serve needs better implies that customers of one type in a cluster,
better premiums can be charged the bank develops the insights by
which a "good" customer can be
differentiated from a "bad"
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 21
Expectations from SME Entrepreneurs
Professionalism in Management
Transparency in Financial data.
Better usage of technology.
Flexible mindset to adopt to changing
Quality consciousness to suit global Standards.
“BOTH HANDS NEED TO MEET TO CLAP” 22
At Bank of India, We are looking at a
Specific Business Model for SMEs
Specific Delivery Focussed Product
Model & Service
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
The paradigm shift in the lending operations of the
Bank to SME sector is to be discerned and managed