Comments on: Do banks know their SME clients?

By: DINA EL HAMOULY

DINA EL HAMOULY — Wed, 28 Oct 2009 15:38:11 +0000

HOW CAN BANKS INCREASE BUSSINESS WITH MEDUIM AND SMALL NON BORROWING COMPANIES
HOW TO CREATE A NEW PRODUCT TO ATTRACT NEW CUSTOMERS

By: abhijit bhattacharya

abhijit bhattacharya — Thu, 15 Oct 2009 08:48:34 +0000

This article appears in today’s Economic Times.
http://economictimes.indiatimes.com/articleshow/5125847.cms?flstry=1

Look forward to your comments

By: abhijit

abhijit — Mon, 27 Jul 2009 11:00:05 +0000

Yes, ra2112 is right about broadbasing transaction based lending and improving its efficiency by linking small businesses with different database. However, for better predictability other techniques must be also employed along with the transaction framework.

By: Abhijit

Abhijit — Mon, 27 Jul 2009 04:00:57 +0000

AKM,
I couldn’t have agreed with you more. The limitations of the traditional approach to lending is nowhere more glaring than in the knowledge sector. As India is aspiring to become leader in the ICT sector, where SME segment holds the key,it is critically important for the banks to develop an evaluation mechanism suitable for promoting such firms. The major weakness of the “collateral-based lending system” is its inherent intolerance of ambiguity. Because of this, it is almost impossible say, for a software startup, to get seed funding. Lenders insist on full proof concept in addition to hefty collaterals.
Relationship lending could be quite effective for making credit available to such firms since it increases faith of the lender on the entrepreneur and thus, tolerance for ambiguity. The lender acquires confidence to believe that the value of the pendrive is million time more than its physical asset value. I fully agree with the view that trust developed through relationship is the secret of success for microfinance in many parts of the world. Only, as they grow the microfinance organizations have to be careful of the inverse relationship between size and ambiguity-tollerance.
You may find this article interesting, though it is not directly related to SME credit:
http://economictimes.indiatimes.com/articleshow/4416690.cms?flstry=1

Abhijit

By: ra2112

ra2112 — Thu, 23 Jul 2009 10:55:37 +0000

One of the key factors is to develop the crediable credit ratings mechanisms to broadbase the transaction based lending. This combined with using online tools to source and execute the business will lower the cost of actual transactions and will give banks more leeway to allocate more resources to risk management.

The key is creating an effective database and linking all the financial transcations to that.

While the govt creates UIN for every citizen, it needs to link to the small businesses which these companies run as it is going to be one of the major tests whether the system leads to more inclusive growth or not.

By: AK Menon

AK Menon — Mon, 13 Jul 2009 16:17:58 +0000

Professor, I would like to second you on the issue of ‘transaction based’ lending visavis that of ‘relationship based’ becomes even more pronounced when banks encounter SME’s offering services! Some professionals forget the dictum-higher the risk, higher the return!! And so, tend to go safer with traditional businesses !

1. Compared to manufacturing companies-which tend to have high turnovers-most service organisations highlight their ‘fee based income’ -which is of significantly lower size, but of higher margins!! Some bankers often get carried away by the vanity of the topline, not so much concerned by the sanity of the bottomline !

2. There is an overwhelming clamour for ‘recoverable assets’ -so much so that bankers prefer to value a godown of plastic buckets much more than ‘intellectual property’ which often is ‘virtually’ online, perhaps at the mercy of a ‘username’ and password!!

The silver lining is that microfinance has become a fashion in the recent times, and so there is substantial money flowing in-even if it is restricted to women self help groups!! Who knows, some banks would soon fund as ‘early angels’ based on relationships’ or ‘potential’-which would prove to be a great catalyst for SMEs worldwide11!