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UPDATED: August 8, 2011 NO. 32 AUGUST 11, 2011
Lending a Helping Hand to SMEs

Small and medium-sized enterprises (SMEs) play an integral role in China's economy. About 99 percent of Chinese enterprises are SMEs which provide nearly 80 percent of job opportunities in urban areas and contribute 60 percent of the country's GDP. Access of funds has long been a problem for Chinese SMEs as they are often considered too risky and banks prefer to lend to big companies, particularly reputable state-owned enterprises. But banks can do more to support SMEs, said Som Subroto, global head of SME Banking at Standard Chartered Bank in an article for Beijing Review. Edited excerpts follow:

In the post-financial crisis world, governments the world over are grappling with ways to entice bank financing for small and medium-sized enterprises (SMEs). These enterprises are widely recognized as crucial drivers of growth and employment.

Often—especially in times of financial stress—SMEs find credit in short supply since most lenders see them as risky investments. Consequently, these dynamic companies may struggle to fulfill their full potential as engines of economic development and job creation.

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

A benign regulatory environment and availability of positive credit reference agencies help governments have a clear role in creating the economic conditions and financial infrastructure that allow SMEs to thrive. In hard times, government intervention—in the form of credit guarantees or underwriting schemes—has proven successful in keeping credit flowing to many Asian SMEs.

But what about the banks? How can we do more to support SMEs?

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, maximize returns on spare capital or protect the business from various forms of risks. SMEs' needs have not traditionally been well served by banks.

In other words, to operate soundly, SMEs require banks that are able to 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 offered the same products and services to SMEs, whether they were dealing with small businesses or medium-sized enterprises. However, the situation is 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 capabilities to address issues such as tax and legal matters. Banks can help, by partnering with experts to offer them advice.

By deepening and widening relationships with SME customers, rather than focusing on lending alone, banks will gradually build up their level of comfort with SME risk. However, there is more that banks can do to support SMEs—for example by reaching 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 quickly 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.

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, then working out a way of banking all those companies, including SMEs.

For such an approach to work, however, banks must focus on long-term relationships with their clients, not products or short-term gain. It is paramount that staff 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. As highlighted in Standard Chartered's 2010 Super-Cycle Report, the old patterns of world trade, dominated by advanced economies are being reversed, as the economies once referred to as "the periphery" rapidly take 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 local 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, 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 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—serve SMEs while reaping profits.

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