Banks can do more to help SMEs

In the post-global financial crisis era, governments the world over are battling to get more bank financing to small and medium-sized enterprises (SMEs), which today are widely recognized as crucial drivers of growth and employment across economies.

Often, especially during times of financial stress, SMEs find credit in short supply, as lenders judge them too risky to transact with. Consequently, these dynamic companies may struggle to fulfill their full potential as engines of economic development and job creation.

Unlike large companies, which can access capital markets or use cash flow to make large investments, SMEs rely heavily on bank finance to fund growth, but often lack the robust track records they need to borrow at affordable rates.

A benign regulatory environment and availability of facilities such as positive credit reference agencies are of great help: governments have a clear role in creating the economic conditions and financial infrastructure that allow SMEs to thrive. In hard times, government invention, in the form of credit guarantee or underwriting schemes, has proven successful in maintaining credit flow to many SMEs in Asia.

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.

It's not all about loans, however. From our work with hundreds of thousands of SMEs across Asia, Africa and the Middle East, we have found that, just like large companies, SMEs including their owners and directors require a full range of banking products and services to meet their needs. These may include help to manage payments and cash flow more efficiently, maximizing returns on spare capital or protecting the business from various forms of risks. But banks have not served well these SMEs' needs.

In other words, to run successful businesses, SMEs require banks that will provide them with everything from payroll, payment collection, current accounts and debit cards to cross-border banking, investments, foreign exchange and derivatives.

In the past, banks tended to offer the same products and services to SMEs, whether they were dealing with small businesses or medium-sized enterprises. However, there is now greater understanding that the requirements of the two segments are very different, with medium-sized enterprises typically having a greater need for customized solutions going beyond basic banking. Small businesses, on the other hand, often lack the capability to address issues such as tax and legal aspects. Banks can help, by partnering with experts to offer them the advice they need.

By deepening and widening relationships with SME customers, rather than focusing on lending alone, banks will gradually build up their level of comfort with SMEs' risk. But there is more that banks can do to support SMEs - for example they can reach out to the small companies that trade regularly with their large corporate clients.

Most SMEs are part of long chains of buyers and suppliers linked to large local or multinational companies. Traditionally, banks have not been proactive enough in supporting SMEs as part of these extended corporate families. But this is changing fast as 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.

It is a whole new way of leveraging existing client relationships to fast-track new ones. In essence, it is about talking to your best clients and finding out who their best customers and suppliers are - and then working out a way of banking with all those companies, including SMEs.

For such an approach to work, however, banks must focus on long-term relationships, not products or short-term gain, with their clients. It is paramount that all staff members work as one to support clients across teams, functions and individual markets, if they are to deliver solutions such as supply chain finance and trade finance successfully.

There is much to suggest that these types of financing are becoming increasingly relevant. The world is more open than ever, with world exports rising as a proportion of GDP. The old patterns of world trade, dominated by advanced economies are being reversed, as the economies once referred to as "the periphery" rapidly take on a central role in world affairs. To capitalize on opportunities in the profusion of new markets and trade corridors, multinational corporations need to work fast to establish networks on the ground.

International banks with a presence in emerging markets have a crucial role to play in linking SMEs to these increasingly global supply chains and, as the SMEs expand and grow, in providing them with cross-border solutions and banking services in multiple locations.

With SMEs in many economies accounting for more than 95 percent of enterprises and around half or more of employment and GDP, the social and economic importance of sustained SME financing is now well understood.

As more new technologies and approaches to serving SMEs become available to banks, the traditional notion that such customers are too risky to transact with 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 increasingly do, transact with SMEs profitably.

The author is global head of SME Banking, Standard Chartered Bank.

(China Daily 09/29/2011 page9)