'SME lending brought us better interest spreads'

What does your bank aim to achieve with its SME loans? Have SME loans been profitable for your organisation? How big is your SME loan portfolio at present?

MTB plans to have SME loans as 25% of its total loan portfolio. This indicates a strong commitment to support SME business in their growth and developments.

We aim to maintain a low classified portfolio for SME loans. This means that MTB intends to minimise NPLs, which ensures that the loans provided to SMEs are of good quality and have a higher likelihood of being repaid.

MTB's focus on loan diversification is a crucial risk management strategy that enables us to balance the bank's exposure, enhance financial stability and support the economic growth of different sectors and businesses.

SME loans have been profitable for the organisation. These loans have a better spread compared to other types of loans, indicating that they generate higher profits for the bank. Our SME loan portfolio is currently worth Tk2,688.81 crore, which constitutes 11.79% of our total loan portfolio.

What businesses in the SME sector have good potential for growth?

The SME sector has good potential for growth in the following types of businesses: 

Service sector: The demand for various services continue to increase as the economy develops and consumer preferences evolve. 

Small and marginal business: Small and marginal businesses, particularly those operating in niche markets or catering to specific customer needs, have the potential for rapid growth.

Export-oriented business: Exporting products or services to international markets can experience substantial growth opportunities. Expanding beyond domestic borders allows them to tap into larger customer bases and benefits from the global demand for their offerings.

Import substitute business: Such businesses contribute to import substitution, leading to economic self-sufficiency and potential expansion.

How has MTB fared in the SME financing sector so far?

SME banking has given us the following results:

Better spreads: We have experienced better interest rate spreads, which means the difference between the interest rate at which we lend to SMEs and the rate at which we acquire funds from depositors or other sources is favourable. This has contributed positively to our profitability.

Fund diversification: SME banking has allowed us to diversify our loan portfolio by catering to the divergent financing needs of thousands of small scale SMEs. This diversification reduces the risk associated with concentration in specific sectors or types of borrowers.

Low-cost deposits: SME banking often attracts a huge number of small businesses as depositors, offering a source of low-cost funds for the bank. These deposits can be stable and contribute to our ability to lend at competitive rates.

High classifications of total loans: One of the challenges in SME banking is the risk of loans becoming NPL due to factors like low resilience during downturns or business-specific issues. This can lead to high loan classification ratios.

Managing difficulties: SME borrowers generally do not maintain proper documents and are not well structured. So, shoe leather cost against SMEs is comparatively high. 

How would you say SME banking is different from traditional corporate banking? 

SME banking differs from traditional corporate banking in several ways: 

Versatile business: SMEs often have diverse and flexible business models. They may operate in various industries and their financial needs can vary significantly. 

No black and white financials: SMEs may not always have well-established and clear-cut financial statements or credit histories. Unlike large corporations that typically provide comprehensive financial data, SMEs might have financials that are not as straightforward, making it more challenging for banks to assess their creditworthiness.

Lack of documentation: SMEs generally don't maintain extensive documentation, especially in comparison to larger corporations that are often required by banks to assess their credit worthiness.

Multiple aims: SME clients aren't foresighted for long term vision. They want to be rich quickly. This shortcut approach kills them, often jeopardising the loans of banks. 

Less structured: SMEs are generally less structured in their operations compared to large corporations, which often have well-defined hierarchies and governance structures. This can impact how banks engage with SMEs and may require more personalised and hands-on approaches to understand their needs and risks.

What are the typical banking products and services offered specifically for SMEs? How many SME loan products does your bank offer? In your opinion, which financial products are most crucial for SMEs, and why?

For SMEs, banks typically offer a range of specialised banking products and services tailored to their unique needs. These offerings aim to support SMEs in their financial operations and growth.

Term loans: These are loans with a fixed repayment period and regular instalments. SMEs often use term loans for capital investment, purchasing equipment, or expanding their operations.

Demand loans: Demand loans are loans that must be repaid upon the lender's request. They offer flexibility in repayment and can be useful for managing short-term financial needs.

Continuous loans: Continuous loans, also known as revolving credit or overdrafts, provide SMEs with a pre-approved credit limit. They can withdraw funds up to this limit whenever needed and repay the borrowed amount as per the agreed terms.

CASA: Current accounts are transactional accounts that allow SMEs to perform frequent deposits and withdrawals for their day-to-day business operations. CASA deposits are essential for maintaining liquidity and providing a stable funding base for the bank.

SME loan products offered by Mutual Trust Bank: 

MTB Small Business Loan: This loan offers collateral-free financing for CMSME customers, with a maximum loan amount of up to 50 lacs.

MTB Small Business Loan Plus (SBL+): Similar to the MTB Small Business Loan, this product also provides collateral-free financing, but with a higher loan limit of up to 1.00 crore.

MTB Surokkha: This loan product requires collateral as security for the loan. It offers financing options for CMSME customers with valuable assets to pledge as collateral.

MTB Abashon: This loan is financing for construction/renovation/expansion of commercial property for renting purpose 

MTB Mausumi: This loan is designed as a short-term seasonal loan, likely to assist CMSME customers with temporary financial needs arising during specific seasons or periods.

MTB AVA: This loan product is dedicated exclusively to women entrepreneurs, aiming to support and empower them in their business ventures.

MTB Startup Loan: This loan is specifically aimed at supporting and enabling easy access to finance for building startups, facilitating their growth and establishment.

Supply chain finance: The bank provides both factoring and dealer finance services through supply chain finance, ensuring smooth and efficient financing solutions for businesses involved in supply chains.

One of the most crucial financial products for SMEs is the term loan with a short tenor, typically ranging from 18 months to 24 months. There are several reasons why these financial products essential for SMEs:

Access to capital: Term loans provide SMEs with much-needed access to capital to finance their business operations, expansion plans, or investment in assets.

Working capital management: Short-term term loans can help SMEs manage their working capital efficiently.

Asset expansion: The term loan can be utilized to acquire or upgrade assets, such as machinery, equipment, or technology, which are essential for enhancing the productivity and competitiveness of the SME.

Loan downsizing: SME grows and generates more revenue, it becomes feasible for them to repay the loan within a shorter tenor.

Credit building: Repaying short-term term loans can improve the creditworthiness of the SME.

Risk mitigation: Short-term term loans generally carry less risk compared to long-term loans. For both the lender and the SME, this reduces exposure to potential economic fluctuations and uncertainties. Overall, short-term term loans play a crucial role in supporting SMEs by providing quick access to capital, facilitating growth, asset expansion and promoting financial discipline through loan downsizing.

What is the rate of default loans from the SME sector in Bangladesh? How do banks assess the creditworthiness of SMEs and what are some effective strategies for managing credit risk in SME banking?

The SME sector has default loans of 14.16% so far. 

MTB typically assessment the creditworthiness of SMEs using the following methods:

Historical Repayment: Banks analyse the SMEs past credit history and repayment behaviour to determine its creditworthiness. They look at how the SME has managed its previous loans and credit facilities, whether it made timely repayments, and if there were any instances of defaults or delinquencies.

Projected growth: Banks assess the SME's future growth prospects and potential for generating revenue. This involves evaluating the company's business plan, market analysis, and expansion strategies. Financial Statements: Banks also review the SMEs financial statements, including balance sheets, income statements, and cash flow statements. These documents provide insights into the company's financial health, profitability, and liquidity.

Collateral or security: Banks may require SMEs to provide collateral or security for the loan. Assets such as property, inventory, or accounts receivable can act as a safety net for the bank in case of default. The value and quality of the collateral can influence the terms and conditions of the loan.

Credit rating: Banks may use credit scores and ratings from credit bureaus as part of their assessment. A good credit score indicates a lower credit risk, while a poor score may lead to higher interest rates or loan rejection. Business Experience and Management: The experience and capabilities of the SMEs management team are also assessed. A well-experienced and skilled team is more likely to manage the business efficiently and repay loans responsibly.

Effective credit risk management is crucial in SME banking to mitigate potential losses and maintain a healthy loan portfolio. MTB expand on some strategies that are generally effective in managing credit risk for SME loans:

Credit assessment: This should include analysing their financial statements, business plans, cash flow projections, and past credit history. Collateral and Guarantees: SME borrowers to provide collateral or guarantees as additional security for the loans. This reduces the risk exposure for the bank and provides a fallback option in case of default. 

Loan diversification: Avoid concentration risk by diversifying the SME loan portfolio across various industries and sectors. Overexposure to a single industry can lead to higher risk if that sector experiences a downturn. Credit Risk Policies: Establish clear credit risk policies and guidelines for SME lending. These should include maximum exposure limits, risk acceptance criteria, and procedures for loan restructuring and recovery.

Effective loan recovery: Have a well-defined loan recovery process in place to deal with defaulting borrowers. This should involve a structured approach to negotiate repayment terms or initiate legal actions if necessary. By following these strategies and maintaining a proactive approach to credit risk management, banks can enhance the overall health of their SME loan portfolio and promote sustainable growth for both the SME sector and the financial institution.

The SME sector accounts for over 50% of the GDP in most of the developed countries in the world. The ratio is 60% in neighbouring India, and 45% in Vietnam. In our country, however, SMEs constitute 25% to 27% of the GDP, although the sector holds 80% of total industrial jobs. What do you think is holding SMEs back in our country?

I disagree on this one, as definitions in all countries aren't the same. But still we can say our contribution is low. There could be several factors holding back the growth and development of SMEs in your country. Let's explore the points:

Mindset: The mindset of entrepreneurs and policymakers plays a crucial role in the success of SMEs. In some cases, there might be a prevailing belief that starting or expanding small businesses is risky or not as rewarding as pursuing other opportunities. This mindset could discourage potential entrepreneurs from taking the leap and hinder the growth of SMEs.

Predictable risk: SMEs often face a higher level of risk compared to larger, more established businesses. This risk can stem from various factors such as market volatility, economic fluctuations, lack of access to finance, or limited resources to weather uncertainties. If the risk is perceived as too unpredictable or if there is inadequate support in managing it, it can deter potential SME owners from pursuing their ventures or expanding their existing Businesses.

Lack of support: Support from the government, financial institutions and family is crucial for the growth of SMEs. Access to funding, favourable policies, and tailored support programs can make a significant difference in the success of small businesses. If there is a lack of such support in our country, it could be a major factor holding back the growth of SMEs.

Lack of access to information: Access to information is vital for SMEs to make informed decisions, identify growth opportunities, and stay competitive. A lack of access to reliable information, market data and industry trends could hinder the ability of SMEs to innovate, expand, and adapt to changing market conditions.