What does your bank aim to achieve with SME loans? Have SME loans been profitable for your organisation? How big is your SME loan portfolio at present?
EBL's aim is to be one of the market drivers in SME lending with competitive product solutions for customers. In doing so, we have taken a few good steps to enhance our current SME products basket. From working capital to fixed asset finance we have a custom based product nature.
The maximum portion of our SME portfolio is based on collateral-free loans, keeping in mind that SMEs do have difficulties in providing collateral. We believe unsecured access to finance is important for them and it is more impactful for helping their business to grow. Yes, of course we are also profitable here and due to a different refinance scheme from Bangladesh Bank, it is getting easier for us to choose SMEs as a potential segment for business. Our current SME portfolio is roughly over Tk3,500 crore.
What businesses in the SME sector have good potential for growth?
Though the major percentage of the SME portfolio is in the trading sector in line with the country's concentration on trading business, recently EBL is focusing more on manufacturing business and the businesses which are related to the backward and forward linkage manufacturing industries. There are so many small concerns growing up to supply different types of garment accessories, raw materials, semi-finished goods and finished goods.
We are focusing on those through capacity enhancement, supporting working capital, and bill discounting. Fleet financing is a new way of smoothing the delivery system of a business and EBL is doing an extraordinary job in this segment.
How would you say SME banking is different from traditional corporate banking?
There is a big difference: SME customers are not well structured in our country. Fund diversion has a big change in this segment which leads them to default at the end. Our SME relationship managers (RMs) have to guide and monitor them very closely so that the customer remains on the proper track.
We have trained the RMs to be the financial advisor of the customer which will reduce the chance of default. To find out the customer's actual need, we always closely study them, which is usually not required in corporate banking. We require developing different types of products from time to time based on the business type and fund needs. Good part of the SME sector is the risk diversification as we finance more customers along with a diversified industry than a big volume to a single customer.
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?
Most of the financial institutions offer mortgage free finance where the loan limit is not big. This practice is giving a mixed experience to a customer; some are doing well and some are not. The main reason is the mismatch between the fund needs and the sanction amount. Over finance and under finance, both are bad for the customer. In most of the cases mortgage free loans are not properly investigated of the actual purpose therefore under finance has a chance to occur and the customer fails to generate the right outcome using the fund.
EBL has developed numerous SME products based on the customer needs and type. Currently we have developed more than 15 custom SME products which we offer to the customer as per their needs. Sometimes we offer bundle products to cater the customer rightfully. These products are mortgage free and mortgage base. Term loan on purpose based is very much crucial for the SME customer.
As this loan is EMI-based therefore after a certain period of time the loan outstanding becomes zero. For SMEs unsecured loan nature is very important as they cannot give collateral for loans. Keeping this in mind the maximum portion of EBL's SME is based on unsecured loans.
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?
According to news reports, the CMSME sector had the second-highest level of NPLs, which accounted for 12% of the total outstanding loans of Tk44,790 crore as of December. Our assumption it may reach up to 16% plus due to the current global recession and upcoming expected political turmoil due to national election.
The major criteria for assessing the creditworthiness of an SME customer is strong cash inflow and the stability of the business. Taking a mortgage is ensuring safety in case of default but the good cash inflow gives the security of the loan repayment. As the SME customers are not well guided therefore following strategies can be taken to manage the credit risk:
- Stay in close contact of the customer to monitor and guide them regarding the financial aspects
- Ensure the source of cash inflow of the customer is stable, diversified sources will increase the stability
- Investigate the purpose and utilisation of the fund tactfully
- Sound knowledge of the borrower to run the business and ability to take the proper decision in adverse situation may reduce the credit risk
What further policy support could the government provide to banks in terms of SME loan disbursement? What could help improve SMEs gain better access to finance?
Based on the situation the government is circulating the policies to support the SME customer from time to time; so far now the policies are very much accessible to the customer. The application of the credit guarantee scheme needs to be more bank & customer friendly so that banks focus more to finance SMEs. All the financial institutions are following as per given guidance of Bangladesh Bank. Proper awareness is required among the both parties, the FIs and the customer to improve better access to SME finance.
The SME sector accounts for over 50% of the GDP in most of the developed countries in the world. The ratio is 60% in neighboring 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?
As I mentioned earlier, our SME customers are not well structured as of now. If we see the SME market in developed countries we will find the major differences among us are the Structural Development, Know How, Skill Development, Entrepreneurship Development, etc.The total ecosystem is built in such a way that it helps the SMEs to grow better and it attracts the banks to go for more financing in SME sector. It develops a winning position for all parties. We must take the best practices of developed countries and we need to develop more on our side to increase the percentage of the contribution in our GDP. The scope to improve in the SME ecosystem is still huge.
Furthermore, due to not having proper structure and formal documents FIs also could not finance them in their business development.