SME Banking – A Different Approach and a Different Mindset
Posted on Thursday, November 19th, 2015 | By Mr. Sanjeev Anand
The time is ripe for banks to step up their efforts to serve small and medium-sized enterprises (SMEs) in Indian markets. With innovations in technology, newer business models, increased thrust on encouraging SMEs and encouraging regulations, banks are overcoming traditional barriers and finding ways to partner with SMEs profitably.
The banking solutions that work for larger organizations will often not work with SMEs. Partnering with SMEs requires a very different approach and a different mindset. SMEs can sometimes tend to become lax with external capital as they do not have the same kind of capital controls as their larger organization counterparts. Yet, the same SMEs are able to get the most return for the buck when they bring valuable equity to the table as they exercise more diligence. Thus, a new model of banking where the interests of the SME clients and the interests of the banks are integrated is required.
The winning banks of tomorrow are the ones who will –
- Encourage SMEs- Most SME clients tend to have little or no financial or business background. Their financial/business illiteracy is one of the most important factors that influence their credit applications. Instead of taking decisions based on their applications, banks must take proactive steps, understand the contextual background of the SMEs and empower them by providing the financial education they need through seminars, creating special start-up packages and handholding them through the life-cycle of their business. The success of the Mudra Bank which caters to the needs of micro-enterprises is a successful example.
- Partner with the Government: The government is the banker’s biggest ally when it comes to reaching out to the SMEs. Several new initiatives by the government have led to more SMEs coming forth for banking relations. Banks can influence government policy by sharing its learning, establishing risk-sharing facilities and providing valuable information on under-served and un-served SMEs. The government has recently launched several new initiatives and banks can provide advisory support to budding entrepreneurs
- Building a deep understanding of the SME markets: SMEs operate across a widely-dispersed geographical cluster as well as their business models would cover diverse sectors. Dealing with such high levels of heterogeneous clients is a tough ask and one that is nearly impossible to achieve. Instead, banks can identify clear geographical clusters, specific business models and sectors to which it can cater to. Building a deep expertise across a few verticals and geographies will enable the banks to understand how SMEs operate and the nuances of this segment. Digital portals such as SMEcorner.com have made knowledge acquisition and understanding SME sector easier by use of innovative technology.
While most banks are still trying to penetrate and capture the SME opportunity, it is important that banks ask themselves a few important questions –
- Does the bank have the required capabilities to enter and sustain in the SME segment?
- What is the cost-benefit analysis of embracing the SME segment?
- What kind of opportunities would the bank have to forego in its quest to make a meaningful impact in the SME segment?
- What kind of customized offerings does the bank offer to the SME segment that will attract business from the SMEs?
- And lastly, does the bank have resources, the strategy, the human resources, the team and the tools to execute the SME strategy?
In the end, banks must answer these questions honestly, based on data and with a view towards the future. The opportunity to build a sustainable practice that partner with the SMEs in a profitable, value-creating relationship-based approach is there for the grabs.