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Global Best Practices
SME Banking
Ahmed Rashid Joy
Financial Market Specialist
AS, South Asia
International Finance Corporation
Operational Structure
2
(Source: SME Banking Practices: IFC’s Experience and Benchmarking
Results, 2010)
Positioning with
separate P&L across all
products on actual or
shadow basis
Clear management
focus & accountability
Further segmented
organization common
by business size
No one correct way of
positioning
Incentivized behaviors
across the network =
key
Variety of Business Models & Strategies
• Relationship-based
• Retail-based for mass SME
• Advisory-differentiated
• Segmentation-based
• Supply-chain-linked
• Mobile-money-based
• Niched (female entrepreneurs)
• Alternative financing models
3
Example of Relationship-based Strategies:
Standard Chartered Bank
• Adopts one model for small
businesses & another for medium-
size
• Refines segmentation of service
approach by customer revenue
value
• Calculates customers’ value to the
bank & assigns them to 1 of 4
relationship-manager approaches
• Hires former business owners &
manages SME banking specialists
• Differentiates relationship &
service level based on value
• Allows scalability while controlling
service costs
Dedicated RM
Virtual RM
Portfolio Manager
No RM
Example of Retail-based Model for Mass SME:
Wells Fargo Business Direct
5
The small-business market is served by two separate internal bank
organizations.
Business Direct (Small)
• Lends up to $100,000
• Customers with sales < $2M
• Most loans originated through mail,
phone, or in the branch. No banker
relationship
• Extensive use of credit reports for
underwriting & account monitoring. Tax
returns sometimes used for income
verification
• Collateral not usually taken
Business Banking (Medium)
• Lends up to $1 Million or more
• Customers have sales from $2M to $20M
• Loans originated by specially trained
bankers who manage customer
relationship
• Loans made using full financial
statement analysis: liquidity, leverage,
debt-service coverage, etc. (for both
business and owners)
• Loans typically collateralized
Example of Advisory-based Model: TEB Bank in
Turkey
 Gap in the market for a player to emerge
as an SME champion based on perceived
role as the SME advisor
 SMEs provide
• Information establishing proposition,
building customized financing
options
• Business opportunities for revenue
generation or cost reduction
• Financial strategies
 Improved bankability, retention, and risk
characteristics of SME portfolio
 Potential opportunities for
• Business-club concept (Barclays
Africa)
• SME academy trainings and seminars
• SME consultant provision in the
network 6
Example of Segment-based Model: Garanti Bank in
Turkey
• Increases
profitability for bank,
adds convenience and
value to the SME
customer.
• Increases uptake of
sticky products
(deposit accounts,
payroll, pensions,
wealth management).
• Establishes
proposition, builds
customized financing
options (typically for
specific sector funding
requirements),
extends with bundle of
other services for
wallet acquisition.
7
Example of Niche-based Model: Women SMEs
Branded
loan product
• Partners with women SME sectoral associations & business
associations to create visibility
• Develops/adapts a loan product for women SMEs, with a simple
application process & quick turnaround time
Partnership
Branch
business
adviser
• Promotes branch-level business advisers to whom women SMEs
can go for help
Business
skills
• Provides regular financial literacy-skills training for women
• Provides regular business management skills to women SMEs
Product
bundling
• Develops a specific branded product that could be bundled with
benefits for children & investment
Branding
• Develops a specific brand /message for financial services to women
Financial
literacy
8
Example of Supply-chain-linked Model: Citibank in India Leverages Linkages &
Applies Vertical Strategy
Linked Businesses
Distributors & Manufacturers
Product - Trade Finance & Services and other X-Sell
products
- Clean Working Capital (Channel Finance/ PO Finance) PLUS X-Sell
products
Acquisition - In-house Segment Sales Teams - TTLC oriented prospecting (Bulk acquisition strategy)
Marketing & - Participation in industry association events - Communication in partnership with TTLC / GRB
Communication - Advertising in Trade Journals (Eg. Participation in Dealer meets/ Supplier meets)
- Global Network - Clean Credit
- Brand Name - Speedy & simplified Approval Process
- Service & Transaction Excellence - Sales tool to fuel growth
- Speedy Credit Turnaround - EVA improvement
- Trade & Treasury Expertise - Channel loyalty
Risk Approach - Program led evaluation based on buyer - TTLC support (Eg. FLDG, Stop Supply, references, EW information)
profile and basic financial analysis - TTLC linked Transaction financing
Segment Exporters
Value-Proposition
For Dealer / Supplier
For TTLC
Top-tier Local
Corporate(TTLC) & Global
Relationships(GR)
DistributorsSuppliers
Global RelationshipsExporters
9
Alternative Finance Sources: Online
Factoring at NAFIN in Mexico
10
CASE STUDY: NAFIN, Mexico
 Provides online factoring services to SME suppliers
 “Productive chains” program allows SMEs to use
big-buyer receivables for working capital finance
 Credit risk of the SME effectively gets transferred
to higher-quality corporate customers
 By 2009, nearly 500 corporations involved, &d $60
billion in finance extended to more than 80,000
SMEs through 21 banks & non-banks
 Licensing requirements can
allow non-financial-institution
services into the market
 Examples: leasing & factoring
 Strengthen credit reporting
needed to even the playing field
between small and big banks

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Best of SME Banking

  • 1. Global Best Practices SME Banking Ahmed Rashid Joy Financial Market Specialist AS, South Asia International Finance Corporation
  • 2. Operational Structure 2 (Source: SME Banking Practices: IFC’s Experience and Benchmarking Results, 2010) Positioning with separate P&L across all products on actual or shadow basis Clear management focus & accountability Further segmented organization common by business size No one correct way of positioning Incentivized behaviors across the network = key
  • 3. Variety of Business Models & Strategies • Relationship-based • Retail-based for mass SME • Advisory-differentiated • Segmentation-based • Supply-chain-linked • Mobile-money-based • Niched (female entrepreneurs) • Alternative financing models 3
  • 4. Example of Relationship-based Strategies: Standard Chartered Bank • Adopts one model for small businesses & another for medium- size • Refines segmentation of service approach by customer revenue value • Calculates customers’ value to the bank & assigns them to 1 of 4 relationship-manager approaches • Hires former business owners & manages SME banking specialists • Differentiates relationship & service level based on value • Allows scalability while controlling service costs Dedicated RM Virtual RM Portfolio Manager No RM
  • 5. Example of Retail-based Model for Mass SME: Wells Fargo Business Direct 5 The small-business market is served by two separate internal bank organizations. Business Direct (Small) • Lends up to $100,000 • Customers with sales < $2M • Most loans originated through mail, phone, or in the branch. No banker relationship • Extensive use of credit reports for underwriting & account monitoring. Tax returns sometimes used for income verification • Collateral not usually taken Business Banking (Medium) • Lends up to $1 Million or more • Customers have sales from $2M to $20M • Loans originated by specially trained bankers who manage customer relationship • Loans made using full financial statement analysis: liquidity, leverage, debt-service coverage, etc. (for both business and owners) • Loans typically collateralized
  • 6. Example of Advisory-based Model: TEB Bank in Turkey  Gap in the market for a player to emerge as an SME champion based on perceived role as the SME advisor  SMEs provide • Information establishing proposition, building customized financing options • Business opportunities for revenue generation or cost reduction • Financial strategies  Improved bankability, retention, and risk characteristics of SME portfolio  Potential opportunities for • Business-club concept (Barclays Africa) • SME academy trainings and seminars • SME consultant provision in the network 6
  • 7. Example of Segment-based Model: Garanti Bank in Turkey • Increases profitability for bank, adds convenience and value to the SME customer. • Increases uptake of sticky products (deposit accounts, payroll, pensions, wealth management). • Establishes proposition, builds customized financing options (typically for specific sector funding requirements), extends with bundle of other services for wallet acquisition. 7
  • 8. Example of Niche-based Model: Women SMEs Branded loan product • Partners with women SME sectoral associations & business associations to create visibility • Develops/adapts a loan product for women SMEs, with a simple application process & quick turnaround time Partnership Branch business adviser • Promotes branch-level business advisers to whom women SMEs can go for help Business skills • Provides regular financial literacy-skills training for women • Provides regular business management skills to women SMEs Product bundling • Develops a specific branded product that could be bundled with benefits for children & investment Branding • Develops a specific brand /message for financial services to women Financial literacy 8
  • 9. Example of Supply-chain-linked Model: Citibank in India Leverages Linkages & Applies Vertical Strategy Linked Businesses Distributors & Manufacturers Product - Trade Finance & Services and other X-Sell products - Clean Working Capital (Channel Finance/ PO Finance) PLUS X-Sell products Acquisition - In-house Segment Sales Teams - TTLC oriented prospecting (Bulk acquisition strategy) Marketing & - Participation in industry association events - Communication in partnership with TTLC / GRB Communication - Advertising in Trade Journals (Eg. Participation in Dealer meets/ Supplier meets) - Global Network - Clean Credit - Brand Name - Speedy & simplified Approval Process - Service & Transaction Excellence - Sales tool to fuel growth - Speedy Credit Turnaround - EVA improvement - Trade & Treasury Expertise - Channel loyalty Risk Approach - Program led evaluation based on buyer - TTLC support (Eg. FLDG, Stop Supply, references, EW information) profile and basic financial analysis - TTLC linked Transaction financing Segment Exporters Value-Proposition For Dealer / Supplier For TTLC Top-tier Local Corporate(TTLC) & Global Relationships(GR) DistributorsSuppliers Global RelationshipsExporters 9
  • 10. Alternative Finance Sources: Online Factoring at NAFIN in Mexico 10 CASE STUDY: NAFIN, Mexico  Provides online factoring services to SME suppliers  “Productive chains” program allows SMEs to use big-buyer receivables for working capital finance  Credit risk of the SME effectively gets transferred to higher-quality corporate customers  By 2009, nearly 500 corporations involved, &d $60 billion in finance extended to more than 80,000 SMEs through 21 banks & non-banks  Licensing requirements can allow non-financial-institution services into the market  Examples: leasing & factoring  Strengthen credit reporting needed to even the playing field between small and big banks

Editor's Notes

  1. Note to Trainer Model-3 in case 20% + SME portfolio in bank’s balance sheet. This shows four different organizational models among the banks surveyed for the IFC’s 2010 SME benchmarking report. Another option would be to serve small and medium-sized businesses separately. All of the models shown here work. Success of course depends on how effectively an institution implements a model and incentivizes performance. The governance model may depend on bank regulations. For instance, China now requires that the SME banking department have equal status with retail and corporate banking, and report to the bank’s general manager. Note: Students can obtain a copy of the full IFC report, SME Banking Practices, from http://advisoryservices.ifc.org/uploads/documents/Excerpts%20Report.pdf
  2. Note to Trainer These strategies are not mutually exclusive.
  3. For SMALL loans RM concept not cost effective. Virtual RM- Can call anytime; dedicated VRM
  4. This bank offers 7,000 videos for customer. Arrange workshops for SME clients. Need 3 years to be an advisor. Not feasible for small at mass level.
  5. Sector based strategy. All SMEs are not borne equally. They targeted 13 out of 23 sectors in Turkey. Plain Vanilla products are customized for each sectors. SME Pension plan, export finance, deposit etc.