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