The SME Challenge

May 10th 2005 (Pakistan)

Outline Why SME Why Now Business Model Citigroup & SME Role of Government Conclusion

Why SME?

For The Banking System SME Represents A Large & Growing Opportunity

Emerging Markets Banking Revenue Estimated At Over $40Billion

For Policy Makers – It Is A Means To Achieve High Employment

Employs Over 50% Of Labour Force Even In The Developed World

High Economic Growth 50-60% Share of GDP – Engine Of Economic Growth

Culture Of Entrepreneurship Wider Tax Base Alleviation Of Poverty

Why Now? Economic Liberalization (Last 15 Years)

Declining Public Sector Role Privatization Of Power Sector, Oil & Gas, Telecommunications & Other Industries

Emergence Of Private Enterprise As The Engine Of Growth Central & Eastern Europe, China, India, Pakistan

Increasing Regional Economic Cooperation ECC/EU, NAFTA

A “Freer” Trade Environment Reducing Trade Barriers (Tariffs)

Privatization Of Banks Entrepreneurial & Performance Driven Management Increasing Product Sophistication & Better Risk Management Improving Cost Management & Operating Efficiency

Banking Reforms Improvements In Legislation & Legal Infrastructure To Protect

Rights Of The Lenders

What Is SME?Various Definitions

Defined By Size Of Sales Or Number Of Employees Depends On Size Of Companies Relative To Economy EU Less Than 250 Employees & Sales Of Eur

50Million Or Balance Sheet Of Eur 43Million Citigroup $2-$50 Million In Sales [Up To$250MM In Some

Countries]

Differentiating Features Owner/Family Managed Proprietorships, Partnerships Or Small Private Or Public

Limited Companies Generally Suppliers To Larger Local Or Multinational

Companies Low Capitalization & Limited Financial Strength Needs A Mix Of Consumer & Corporate Banking Products

SME - A Hybrid?

•Large & sophisticated relationship managed multi-product customers (need investment banking/corporate finance, derivatives and other high value added products along with traditional banking products).

• Upper tiers need relatively wider product set similar to the larger corporate entities.

• Lower tier, clients needs cut across boundaries of traditional consumer and corporate banking products.

Corporate

SME

Micro

SME - Segment NeedsSME SME SME SME Corporate

Individual In Business-I Individual In Business-II Partnership Limited Company

Sub-Segment A B C D

Sales Size $0-$2 Million $2-$10 Million $10-$25 Million $25-$50 Million

Stage Of Business Leverage Personal

Assets

Stand Alone Business Rapid Growth Growth

Typical Collateral PERSONAL Mortgage &

Asset Backed Finance

PERSONAL Mortgage &

Asset Backed Finance

BUSINESS Mortgage &

Asset Backed Finance

BUSINESS Mortgage &

Asset Backed Finance

Product Needs Deposits Deposits Cash Management Cash Management

Insurance Insurance Insurance Insurance

Credit Cards Credit Cards Credit Cards Credit Cards

Working Capital Loans Working Capital Loans Working Capital Loans

Trade Services Trade Services Trade Services

FX FX FX

Venture Capital Venture Capital

Advisory Advisory

IPO

Corporate Finance

M&A

Business ModelThe Challenge Of Managing Scale &

Diversity

A Full Service Relationship Bank A Customer Relationship Organization

Not A Product Organization Serving All Our Customer Needs

We Manage Our Credit Risk Through Differentiated Processes Based On Size Of Exposure

Our Transaction Processing Aims To Lower Unit Cost Through Use Of Technology Specialization & Centralization Of Functions

Elements of the Business Model

Target Market Definition Key To Long-Term Success Should Be Able To Weather Economic Downturns

The Business Model

Business Drivers Customer Acquisition & Attrition Product Cross Sell Low cost Funding Of Portfolio Management Metrics Expense Management Low Cost Processing Electronic Banking Platforms Risk Management

Separation Of Customer Acquisition & Management Key To Managing Large Volumes & Improving Returns Through Cross Sell

Differentiated Risk Process Exposure Based

Low Cost Processing Of Small Ticket & Large Volumes

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Managing Scale - Credit Risk ManagementTailored Approach Some Product Tailoring To Meet Specific Customer

Needs. Secured & Unsecured Cash Flow Based Lending• Obligor Risk Rating Models - To Differentiate Credit

Risk

Credit Program Approach Broader Product Range

(Trade, Generally Short Term loans, FX) Mostly Secured Lending Rating Or Scoring Models Some exceptions allowed based on grading of customers

Credit Factory Approach Highly Standardized Approach Standard Products (Trade, Generally Short Term loans, FX) No Exceptions & Limited Product Range Delinquency Managed Scoring

Citigroup – Commercial Banking

$ Billion

0

10

20

30

40

50

60

70

2003 2004

$66 BnAssets

$56 Bn Assets

Citigroup Commercial Business

Americas CEEMEA Asia

USA Poland Korea

Mexico Czech Republic Malaysia

Chile Slovakia Thailand

Brazil Turkey Singapore

Hungary Taiwan

Pakistan Hong Kong

Romania India

China

Global but Selective Presence

Role Of GovernmentAs the EU sees it

Governments As Information Provider - Statistics in Focus

Statistical Databases Default History Ownership Details Detailed Annual Financials Financial History Of All Registered Companies Number Of Employees Industry

Available In Most Of CE Countries Poland, Hungary, Czech, Slovakia Largely Available In Turkey

Governments As Facilitators Help With Cheaper & Faster Start-Ups

One Stop Shop Simplified Application Procedures Online Registration Of Businesses

Access To Markets Domestic

Reduced Requirements For Participation In Government Tenders

Targets For SME Participation In Government Procurement Of Goods & Services

International Information On International Opportunities Education On Key Success Factors In The International Market Help Participation In Trade Fares

Education & Training Resources To Develop Entrepreneurs Adequate Supply Of Skilled Human Resources

Governments As Funding Support Providers Grants

EU Grants Under Various Programs Availability Based On Screening Criteria & Priorities

Subsidies To Financial Institutions SME Credit Risk Remains With The Banks European Investment Bank (EIB) Provides Subsidized Balance Sheet

Funding To SME Banks EU Monetary Incentives To Banks – Up To Euro 5000 Per Deal

Booked For Qualifying Transactions (Eur 40K To Eur 500K)

Credit Support/Guarantees Partial Credit Risk Sharing - Up To 80% Of First Loss - Generally

Through Portfolio Risk Insurance Insurance Cover For Receivables.

Venture Capital Funds

Governments As Business Enablers

Taxation Simplification & Reduction Of Tax Compliance Procedures Incentives To Encourage Earnings Retention & Balance Sheet

Growth Flat tax ?

Conclusions

Some Take Aways For Lenders Strong Target Market Definition

Key To Building A Balanced Portfolio & Reducing Credit Losses

Separation Of Marketing, Sales For Managing Scale Focus On New Customer Acquisition Maintaining Existing Customers & X-Selling

Management By Metrics Well Defined & Well Communicated Parameters

Differentiated Credit Process An Efficient System Demands Differentiation In Credit

Maintenance Process Based On Exposure/Risk Being Taken

Low Cost Transaction Processing Small Ticket Size & Large Number Of Transactions Technology Based & Centralized Transactions Processing

And Points For The Government To Consider

Bridge The Information Gap

Help With Cheaper & Faster Start-Ups

Help Increase Supply Of Financing For SME

Facilitate Access To Markets

Enhance Education & Training Resources