'Unregistered SMEs need to be brought under umbrella of banking'

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?

The City Bank has proven its pioneering stance in the banking industry by providing a wide array of banking products to each and every possible segment of the economy.  The bank has been catering to the SME market with its robust network of branches, sub-branches, agents and digital capabilities for a long time. 

In 2018, the bank started to focus on the rising Cottage, Micro and Small Enterprises (CMSE) through a decentralised banking system which largely depends on the door-to-door services model. Since then, the SME portfolio experienced a big increase in growth with an asset size of Tk3,600 crore to date by reaching 30,000 small enterprises all around the country. The segment has been very profitable for the bank.

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

All industries or sectors have chains of SMEs to support their supply chain and reach the optimum population of Bangladesh. Generally, the sectors which are linked to thrust sectors or export-earning sectors of Bangladesh have better potential to grow in the future. If we talk about the local market, the most attractive sectors in the SME segment can be – light engineering, FMCG retailers, pharmacies, local textiles, home fabrics, agro products, groceries, remittance beneficiaries and construction materials businesses.

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

Unlike conventional corporate customers, SMEs fall short of financial tidiness in book-keeping, lack the capacity for providing collateral and have heavy reflections in bank transactions. Mostly, the SMEs are driven by cash transactions, local reputations, book-keeping on a daily basis and sole proprietorship of nature. SME customers barely visit bank branches to apply for a loan or other services. Their demand for loans comes instantly. 

To serve the SME market, banks need to deploy a field force to go to the customers and complete the formalities on the spot. The banks need to maintain the shortest possible time between loan application and loan disbursements, which would serve the needs of SME customers. 

After providing loans, bank officials need to ensure fund utilisation by visiting and keeping in touch with the customers more frequently than other customer segments. Since most SMEs avail collateral-free loans, traditional credit assessment would not be adequate, customers' behaviour, willingness to pay, history, real cash flows, feedback from customers' stakeholders and family background should be checked thoroughly to minimise the default risk.

What are the typical banking products and services offered specifically for SMEs? How many SME Products does your bank offer? 

The City Bank offers unsecured or collateral-free term loans to SMEs, especially the small segment. As most small entrepreneurs lack the capacity to provide adequate collateral to the banks, availing of unsecured term loans gives them the comfort to access finance and repay comfortably. The City Bank also offers overdrafts and single-instalment loans to small businesses based on their operating cycle. It also offers small loans to beneficiaries of remittance, 95% of which are women entrepreneurs in semi-rural and rural areas. At present, a small entrepreneur can get Tk1.5 crore without any collateral. 

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

Determining the creditworthiness of SME customers is different from conventional ones. As I said, SMEs are very dynamic when it comes to credit assessment. The credit analysts conduct an underlying psychometric analysis of the customer while assessing the loan. Different banks use various yardsticks or scoring models to determine the financial and behavioural aspects of a SME customer. 

Multiple check-posts with robust surveillance from loan origination to collections need to be in place. The banks which always have a special focus on SME lending need to be adaptive and capable of identifying financial hazards way ahead of any default. An early alert system for SMEs should be different from conventional customers and be pragmatic and responsive.

What further policy support could the government provide to banks in terms of SME loan disbursement?

During the pandemic, Bangladesh Bank implemented stimulus funds for SMEs which helped re-accelerate lost opportunities. Further policy support for this sector would undoubtedly bring benefits. If the support during the pandemic had not been provided, the SME scenario could have been devastated. 

Since the major SMEs in Bangladesh are involved in trading or merchant businesses, governments can extend this particular segment to strengthen their financial shock absorption. New research should be conducted to find out what needs to be done immediately. Policy support to identify good borrowers and extend facilities to them would promote good governance in the ecosystem.

What do you think is holding SMEs back in our country?

As per research conducted in 2016, Bangladesh has 8 million SME establishments, out of which nearly 1 million have been served by the banks. Still, banks need to go to remote locations to bring the untapped markets to the banking channel. In India, there are 42.5 million SMEs out of which 40% are in the export-earning sectors thus entailing the growth of the SMEs. 

In Bangladesh, there is a significant portion of unregistered SME businesses which need to be dragged under the banking umbrella to grow further. The contribution of SMEs to our GDP can be more if banks extend their digital capabilities to reach remote customers. We have to remember that digital banking can bring more unbanked customers with huge potential.