- 1. BANK OF INDIA SME - A BANKING PERSPECTIVE
2. SMEs -Defined in Different Ways
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- Investments in Capital Assets
- Investments upto Rs. 1cr for SSIs
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- TurnoverRs. 50 cr to Rs. 75 cr?
Several Waysof DefiningSMEs Key Characteristics from Banking
Perspective 3. 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 isnotthe key issue from a Bankers Perspective 4. What
ConstitutestheSME Sector
- It is rather difficult to define precisely as to what
constitutes the SME sector, as
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- It covers a wide spectrum of activities ranging from
manufacturing to trade to services.
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- It involves different types of organizations with varying
constitutions like proprietary concerns, partnership firms, private
limited companies, public limited companies.
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- Regulations/ Govt. Policy guidelines varies from activity to
activity.
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- It overlaps with the presently defined Priority Sector.
5. In the given scenario, it can be broadly said that the SME
segment would include the following Individuals
IndividualsasBusinessmen Professionals Partnership &Family
owned Business Small &Medium SizedCompanies LargerCorporate
CorporateGiants/ PSUs Retail Segment SME Segment (Constitutionwise)
Wholesale / Corporate Segment What Constitutes the SME Sector .. 6.
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 7. 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 8. SME Financing a Win-Win
Situation for Banks
- Better spreads on interest/ bundling of services for enhanced
yield in relationship.
- Banks 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 9. 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 TODAYS LARGE CORPORATE CLIENTS HAVE BEEN NURTURED AS SME
BY PSU BANKS 10. Of Late, SME Segment has attracted a lot of
attention
- Increasingly higher pressure on margins in Corporate
business
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- Markets are becomingmore 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
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- Call Centre, ATM, Internet
- Most Banks have upgraded their Risk Management System
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- 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 11.
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 12. 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 13.
Approach has to be different from Corporate Clients Risk Mgmt /
Pricing Product/ Service Offerings Service DeliveryStructures Based
on Probability of default and loss given default (LGD) 14. 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 15. Unlike Corporates, A Wide
Branch Network Required to Serve SME A PSU Banks Branches with High
SME Business in Mumbai
16. NPAs 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 Banks
NPAs NEED TO BE MANAGED NEED NOT BE A DETERRING FACTOR Leads to
HighNPAs and Lower Profitabilitythan thePotential To
beMitigated
- Collection of authenticate data on the SME segment
- Educating the SMEs on the need for reliablefinancial data
- Rolling out suitable risk models for differentsegments &
SMEs
- Close monitoring of the accounts
- Being supportive to their financial needs to avoidquick
mortality
17. 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 18. Cluster
Approach
- 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 Wholesalersarepan-India in
nature. Locations with only these clusters do not appear on the
mapLocations that are underlined not included in the top 50 centers
Source:Market interviews; Analyst reports; Associations and
directories; BCG analysisWholesale (Agriculture RM) 19. Cluster
Approach ...
- Cluster approach may be beneficial as -
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- Separate packages/ services can be developed for each
cluster.
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- Products/ services so developed implies that better yields can
be realized.
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- Authentic statistical/ market data for different units under
the cluster can be collected which would help in formalizing
locational specific Risk Management frameworkfor the industry.
20. Different Clusters have different Demands Wearing
Apparel
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- Bill discounting Letters of Credit
Travel operators
Logistics providers
Pharmaceutical manufacturers
Key products used Key needs NEED TO SERVE DIFFERENT CLUSTERS
DIFFERENTLY 21. Focussed Cluster Approach Beneficial 22.
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 23. AtBank of India , We are
looking at a Specific Business Model for SMEs Clearly defined
Target Segments Focussed Product & Service Offering Specific
Delivery Model Bank ofIndia SME Model 24. Conclusions
- 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.
25. Thank You