In which geographies and sectors are banks lending to SMEs? What are the improvements in customer convenience? How are the banks improving fraud prevention measures? How are tech and fintech firms enabling SME business? What applications are banks developing inhouse? SME banking heads from 5 banks across India, Bangladesh and Nepal reveal the the answers in this cover story:
Part 1: The sub-continent gears up for SME lending
SME & MSME banking heads discussed about the key geographies, industry sectors & supply chain finance:
SMEs & MSMEs have emerged as game-changing for economic growth. The share of the formal MSME sector in the GDP is up to 40% in emerging economies. According to an IFC report, just one-fifth of the financing gaps faced by MSMEs were filled by formal credit, leaving 85% of MSMEs underserved in terms of credit. For many banks SME lending is now the golden opportunity and they are taking multiple initiatives to serve this core segment.
SME Banking Initiatives
Capital Small Finance Bank has been lending to SMEs since its inception while operating as a local area bank. SMEs have been a major growth driver throughout the bank’s journey. To cater to their needs, bank offers a bouquet of products including working capital finance, long-term finance for the purchase of fixed assets, and bank guarantees. The bank has been funding deserving and capable greenfield projects as well.
Aseem Mahajan, Deputy Chief Financial Officer, Capital Small Finance Bank asserts: “We work on the philosophy of production credit, rather than chasing the consumer credit that helps us earn the actual cash flows of the MSME customers and supports us towards our target to become a primary banker for the client. The MSME sector has bloomed a lot in the last few years and still many new MSMEs are emerging in the market. Over 20% of the overall advance portfolio of the bank comprises of MSME and other business loans and it will continue to be one of the key business segments for the bank.”
The South Indian Bank (SIB), established in 1929 at Thrissur in Kerala, is one of South India’s oldest banks. Over the years, it has expanded nationally with 930 branches and 18 regional offices across the country. Its nationwide presence enabled it to serve the MSME sector way before it was recognized as the Indian economy’s backbone.
Thomas Joseph K, Executive Vice President & Chief Business Officer, of South Indian Bank open up: “Our products are aligned with market expectations to provide MSMEs with easy and timely access to funds. Our products cater to MSMEs from all industry segments, including manufacturing, trading, service, etc.”
SME Banking in Bangladesh
In the last 4 decades, lending to SMEs in Bangladesh has mostly been done through MFIs. The rate of interest of MFIs might have been a big issue, however, the social impact and the financial inclusion were duly taken care of. Due to the higher operating cost the rate of interest was quite high even then, the MFIs could expand the market size and aid a steady GDP growth rate for the country. The social impact of MFIs is also undeniable covering basic health awareness, sanitation, and reducing child mortality rate and there are many such examples.
For ensuring the SMEs are covered within the financing net, regulators time to time enforced banks to finance in the agriculture and SME Sectors; however, it was quite difficult for the banks to lend to remote geographies and a majority of Bangladesh’s banks used the MFI window for lending to the SMEs.
Eastern Bank offers tailor-made and innovative financial solutions in diverse industries all over Bangladesh focusing specifically on the financial inclusion of women entrepreneurs. Its focus in SME lending is to cater to the manufacturing segment of the economy – particularly readymade garments, textiles, leather, jute, steel, iron, construction, transport, etc. Lending to the trading sector is higher than the manufacturing and service sectors.
M. Khorshed Anowar, Deputy Managing Director & Head of Retail & SME Banking, at Eastern Bank says: “We are also working to develop selected clusters in Bangladesh such as leather, light engineering, agro-based industries, hosiery, etc. The bank also finances region-specific clusters in Dhaka, Chattogram, Bogura, Narayangonj, etc. Our main goal is to keep a diversified portfolio by ensuring all eligible businesses are provided with required financing as per their business requirement and repayment capacity.”
Modhumoti Bank is predominantly a corporate-centric bank and corporate banking contributes 75% of the total portfolio, which was even higher in earlier years. In the last few years, mostly during the pandemic, banks took a strategy to finance the supply chain and distribution channel of the existing corporates – which are mostly SMEs. This decision helped the bank in every aspect. With the help of fintechs, Modhumoti Bank’s digital banking points made it possible to extend loans to remote rural/suburban SMEs. Lending was extended to the regular supply chain and distribution channels, having a relationship with the corporates for a substantial period and drawing comfort from the feedback of the corporates on the newer ones.
Kamrul Hasan Khan, Deputy Managing Director & Chief Business Officer, of Modhumoti Bank shares: “Through this mechanism, the end-to-end fund flow has been channelized through our bank which resulted in liquidity support and control on the credit. The agri and subsidized microfinance by the central bank has been disbursed to the farmers which is much cheaper than that of the MFIs.”
Potential Sectors in Nepal
Nabil Bank has been serving the Nepalese banking industry since 1984. Nabil Bank has been known as a corporate sector bank and had only a few branches in major cities of the country. However, in the last few years, it has shifted its focus from corporate clients to the retail & SME sector and has been able to build a robust portfolio of 28% in the SME sector. Alongside, the bank has increased its branch coverage 3-fold and covered most of the rural areas as well. Nabil Bank is the market leader in the SME sector at present with more than 10% market share.
SMEs in Nepal operate in diverse industry sectors and to cater to these sectors, Nabil Bank has provided various products in the market such as Nabil Kishan Karja, Commercial Agriculture Loan for agriculture sectors, subsidized loans for deprived sectors, Channel Financing for supply chains and customized SME loans for all industries with customized requirements.
Niraj Basnet Danil, Chief SME/Microfinance/Sustainable Banking at Nabil Bank offers more insights: “In Nepal, there is a high saturation of importers and traders in the market. Evaluating the available opportunities, Nabil Bank has launched channel financing where the customers within the supply chain are provided with working capital or short-term funding solutions to support the smooth flow of goods and services along the supply chain. This product also promotes banking transactions in each step so that the end use of funds is ensured.”
Nabil School of Social Entrepreneurship
Nabil Bank has also introduced the Nabil School of Social Entrepreneurship (Nabil SSE) which aims to institutionalize social entrepreneurship and foster socio-economic transformation. It helps in promoting social entrepreneurship within society based on innovative solutions to long-term social problems.
Niraj delves deeper: “Nabil SSE has tie-ups with 7 colleges across the country to run a 3-month certificate course for social entrepreneurs. As of now, 18 participants have completed the fellowship program and 137 participants have completed certification courses. Further, 18 and 88 are currently enrolled in the fellowship program and certification courses respectively. This project will help in enhancing upcoming SMEs business in all geographies and promote startup culture in Nepal.”
Part 2: Co-lending rides on NBFCs, NGOs & Fintechs
Co-lending is becoming increasingly popular. However, there are multiple approaches:
Nabil Bank has been conducting the co-lending mechanism with MFIs for the deprived sectors – the bank has lent about 3% of its portfolio. This has helped the bank reach the grassroots levels where it does not have a presence, and has been successful to date. It has also tied up with various other agencies for co-lending.
During covid time, the bank provided interest-free loans to selected customers in partnership with ‘One To Watch’ which did the initial screening for the bank and also repaid the interest for 1 year. For the renewable energy sector, the bank has been working with NREP for technical assistance and a 5% interest grant where NREP also support the bank in the technical assessment of the proposal. Niraj adds: “Nabil Fone Loan itself is a co-lending mechanism where the digital platform is owned and managed by a fintech company and has been integrated with the bank’s digital platform/software via APIs.”
Agri Loans & Insurance
South Indian Bank is in the early stages of co-lending to SMEs. The bank has a board-approved policy governing co-lending to SMEs. The bank has identified a few NBFCs with expertise in SME lending and is in the process of firming tie-ups with them to tap rural markets where it has limited presence.
Thomas gives additional details about the partnerships: “To enable seamless integration with our NBFC partners, we have enlisted the services of a technology solution provider. We aim to create a robust co-lending portfolio in association with our NBFC partners and by deploying sophisticated technology platforms.”
Eastern Bank has partnered with 17 NGOs and has disbursed agri loans amounting to BDT 3.83 bn to customers across Bangladesh in FY 2022-23.
As per Kamrul, apart from the bank, non-bank financial institute, and MFIs, no other organization is allowed to extend a loan in a formal channel and the regulator has yet to approve any co-lending in the country. However, collaboration with fintech with a revenue-sharing model has started in the market. Modhumoti Bank has executed a few deals with fintech in medi-care, health insurance, cattle insurance, and crop insurance.
Part 3: Aligning Products & CX with SME needs
SME experts discuss about the improvements in customer convenience in SME lending products, onboarding & ongoing servicing:
Eastern Bank has created products to meet the specific needs of the SME customers. For women entrepreneurs, it offers loans up to BDT 5 million with relaxed eligibility conditions and loan assessment practices, and flexible repayment terms. It extends collateral-free financing up to a certain amount to suppliers and dealers of large manufacturers. Its Supply Chain Finance (SCF) products are short-term working capital finance blending term loans, demand loans, and overdrafts and are offered to dealers/suppliers of large corporate industries.
M. Khorshed details: “We offer unsecured loans up to BDT 15 million without any collateral coverage. We give primary importance to business cash flow during credit assessment in our bid to improve access to finance for SMEs. Eligible start-ups can avail of mortgage-free loans up to BDT 10 million. Many up-and-coming start-ups with innovative ideas are enjoying loans amounting to BDT 25.50 million with us and more than half of the beneficiaries are women entrepreneurs. We aim to leverage this financial instrument to enable financial inclusiveness and enhance financial literacy among young entrepreneurs.”
The bank has launched fleet financing to cater to the logistics and operational requirements of businesses. Businesses will be able to get loans up to a certain amount without providing any collateral.
On-boarding & Servicing
To improve its portfolio, South Indian Bank has reorganized the bank’s advances business into different business verticals, including an MSME business vertical. The vertical boasts dedicated business teams with expert relationship managers (RM).
The bank has a people focus for this business. Thomas details: “The over-300-member new team is experienced in handling MSME credit and is also being continuously trained to further improve the quality and speed of service. A proper organizational structure comprising regional sales heads, zonal sales heads, and back-office support staff has been established. We aim to provide better services to our existing MSME customers and to expand lending relationships to new-to-bank entities.”
Nabil Bank enables SMEs to input all their details on the bank’s website from where it is directly routed to loan officers of their preferred branch. The loan officers analyse the details provided and reach out to them with suitable products.
According to Kamrul Hasan, while extending products and services to SMEs, Modhumoti Bank’s digital banking platform in collaboration with fintech has helped the bank onboarding its customers to a great extent. In the onboarding process, the loan application is processed at that agent’s end as per the set procedure and later the physical documents are sent to the branches which are then uploaded into the system for processing. Upon approval and disbursement, the customer uses the bank’s apps for various services.
Tech Driven Initiatives
Innovation, business process re-engineering, and digitization have been the major focus in developing strategies and policies at Nabil Bank. In standardizing and automating processes and bringing objectivity to decision-making, it has introduced a credit scoring model through ‘Nabil Sajilo Express Karja’ which is a new innovative model that replaces the traditional approval system. The credit scoring model is a statistical tool that uses quantitative measures of the performance and characteristics of past loans to predict the future performance of loans with similar characteristics. A credit score is assigned based on the evaluation conducted through a set of questionnaires using statistical tools.
Niraj outlines the benefits: “This model has helped the banks simplify and streamline the lengthy SME lending process, with a significant reduction in TAT. The faster turnaround time of SME loans thanks to this model has created a new appeal in the SME Industry in Nepal. Further, this has helped our bank to overcome the major hindrance of lengthy processing of loans application even when the ticket size is minimal.”
In a continuous effort to improve processes and procedures, South Indian Bank has introduced an improved credit underwriting model – SMILE (SIB MSME Integrated Lending Engine). Thomas shares details: “The new model would enable us to enhance our credit underwriting systems by building an outstanding business rule engine, improve credit decision-making, and better our turnaround times (TAT) for quicker disposal and higher risk-calibrated growth.”
In a constant pursuit to improve CX, South Indian Bank has been making improvements in its existing products and services portfolio. South Indian Bank has developed specific products to cater to various borrower segments.
Thomas shares: “For borrowers up to Rs20 million, we have an MSME online portal that provides an indicative term sheet where we accord in-principal approvals for loan applications based on certain broad scheme parameters and internal norms. In May 2023, we rolled out a new simplified and parameterized product ‘SIB ZOOM’ which has helped considerably improve the TAT for loan processing. We are offering the product at competitive prices to customers with a good credit history.”
According to Neeraj, in the context of annual loan appraisals of credit customers availing revolving nature of loans, various new formats are developed which help to complete the credit appraisal process easier and faster at Nabil Bank. Digitized collateral and business visit reports with the help of the mobile application, virtual platform for credit approvals, loan originating system, and loan management systems are some of the improvements that help in providing services to customers efficiently and conveniently.
Capital Small Finance Bank has been catering to MSME clients for more than 2 decades (previously as a LAB). The bank has its learnings from years of experience with MSMEs. The strategy has been not only to reduce the operational difficulties for the staff but also to make the entire relationship smoother for the customers as well. Aseem says: “There have been many instances where we have tried to achieve it. One of the cases that we can quote is, overdraft facility commonly known as OD limit instead of a CC limit was a step in this direction, which cuts out the regular documentary requirements from the clients.”
The SFB has introduced working capital facilities in small tickets with minimal paperwork, to ensure that the deserving MSME units are not made to pass through unnecessary hassles. Aseem added: “To support the MSME, we have always tried to cater to any business need of the client through our services and product offerings, be it on the lending side, or be it on the operational or digital side.”
Part 4: Advanced tools help combat fraudsters
Banking heads shared their bank initiatives for controlling NPAs and frauds among their SME & MSME customers:
South Indian Bank has aligned its processes, procedures, and monitoring systems to ensure that each customer being on-boarded is a productive addition to their portfolio. The bank has a well-defined system in place for checking the credit history and background of the borrowers being on-boarded.
Says Thomas: “We utilize different reports available internally and through external sources to analyse the prospective borrower’s credit history and financial behaviour. To identify potentially fraudulent entities, we use facilities such as Hunter Fraud check reports by Experian, Central Fraud Registry reports, etc. We have also engaged agencies to provide Fraud Check Verification (FCV) reports on loan applicants. We have an exclusive credit monitoring team in place for closely monitoring the transactions in the accounts and to flag off early warning signals (EWS). The team extensively uses technological tools to weed out prospective bad accounts.”
RMs & Recovery Teams
At Eastern Bank, monitoring starts from the day of loan disbursement. The relationship manager is responsible for the initial monitoring of the loan. Quarterly inspection reports must be submitted as part of credit due diligence. For validating credit scores, for continuous loans, the scores are validated annually and for one-time term loans, scores are validated during top-up/enhancement application. Scores are validated by the credit risk management department. For generating credit scores, data is collected by taking important documents such as financials, account statements, credit reports, etc.
M. Khorshed said: “If a loan becomes overdue for over 90 days, the monitoring responsibility was given to the special asset management department previously. In our bid to control NPAs and frauds, a special recovery team has been set up to monitor loan performance until the loan becomes classified.”
The SIB business team works closely with the monitoring team to ensure that corrective steps are taken on a timely basis. The bank’s RMs closely monitor flagged-off accounts to ensure compliance. These initiatives and monitoring tools help the private bank to manage the NPA levels from the onboarding stage.
Fraud Control Mechanism
For a lending business, you must lend the right need for the credit and have a decent mechanism in place for collection and recovery. Capital SFB has put in place better systems and controls starting from underwriting, monitoring, and recovery, consequently, has been able to maintain a net NPA of 1.36% as of March 31, 2023, with nil technical write-off and negligible other write-offs during the tenure of the bank.
As per Thomas, one of the best methods for monitoring the client is relationship banking which is the primary goal of the bank. The dedicated experienced teams ensure effective monitoring of the portfolio. South Indian Bank has set up internal systems that help to provide daily inputs on the delinquencies and stressed accounts digitally and further monitoring of Early Warning Signals (EWS) provides additional control on large value exposures. Nevertheless, the bank is always trying to improvise its systems and processes with a focus on digitalization.
Nabil Bank has been implementing the mechanism of independent quarterly inspection of the business loan for proper monitoring and has been reviewing the delinquencies closely where any transaction in the accounts having overdue in unit or group is further escalated to the higher authorities based on the DPD. Niraj explains: “The NPA department has been provided with an increased number of resources with senior officials to head the department for efficient decision and delivery. The risk department also conducts the quarterly/half-yearly portfolio review to facilitate appropriate actions.”
Part 5: Tech & fintech partners boost innovation
Banking heads share the details of technology and Fin-tech partners in SME lending:
Eastern Bank has been focusing on enabling financing using digital platforms. It has introduced supply chain financing in a digital platform leveraging on ERP integrated state-of-the-art digital platform powered by VEEFIN.
BPM, BRE, CRM & LOS
South Indian Bank has been associated with various fintech entities and technology solutions providers for implementing business improvement interventions. An online portal for MSME customers that provides instant in-principal approval for loans up to Rs10 million. This intervention has allowed the bank to eliminate the ambiguity hovering around a customer’s eligibility and the cost at which it disburses funds. Some of the key features of this online portal are: (i) End-to-end digital journey (ii) Entire process can be completed within 10 minutes (iii) Instant in-principle approval up to Rs10 million with concessional interest rate and processing fees (iv) A mobile-friendly interface for ease of access (v) RM-assisted mode available to generate in-principle approvals, and (vi) Integration to check individual and commercial bureau reports and GST sales data.
The bank has introduced a robust CRM application (CRM Next) for lead creation, assignment, appointment fixing, etc., and generating reports and dashboards for the same. Once a loan proposal is identified as feasible, a business process management software (BPM) developed by Newgen Software analyses the proposals.
Thomas shares details: “It captures the data and routes the proposal to different functionaries as per the credit sanction policy of the bank. The credit sanction process is completely digital. Further, third-party applications such as bank statement analysers, saver risk intelligence reports, etc, are deployed for the underwriting process. The BPM process is also integrated with a BRE (Business Rule Engine) solution that derives a PD (Probability of Default) score based on the data inputs to support credit decision-making. Moreover, BPM systems are also capable of generating system-generated sanction orders at the click of a button.”
EWS, SMA & LOS
South Indian Bank is also equipped to execute loan documents digitally through an eSign and document workflow platform, powered by Legality. It enables execution of loan documents digitally from a remote location with Aadhaar-based authentication. Fulkrum provides us technological support to monitor accounts post disbursement.
Thomas adds: “The tracking mechanisms include EWS, SMA (special mentions accounts) and NPA tracking, Income Recognition, Asset Classification (IRAC), etc. Newgen Software is again assisting us in revamping our Loan Originating System (LOS) to integrate it with other applications to enable a seamless data flow. It will further reduce the TAT between lead generation and loan disbursement.”
Nabil Bank, in its quest to improve services to the SMEs, has partnered with various digital solution providers such as New Gen Technology having local partner CAS, which has assisted in changing the dynamics of the entire loan processing system, through the integration of Business Process Management System (BPMS) software that boosted speed and efficiency. The file approval system which used to take around a month has been reduced to 8-9 days. This software has automated various internal processes of the loan originating system and loan management system of the bank.
Further, local technology giant, f1soft is also another major tech service provided to the bank for nBank app, foneloan, etc. Recently, Nabil Bank has introduced one loan product to the bank’s QR Merchants with technology support from f1soft.
Niraj shares additional details: “The ‘Nabil Fone Loan – QR Merchant’ is an innovative product that revolutionizes the lending process for merchants. By leveraging contactless digital transactions through QR codes, it eliminates the need for physical paperwork and conventional credit application processes.”
Merchants can instantly access pre-approved loans through the nBank mobile banking app, without the hassle of visiting a bank. The product’s automated analytics system assesses eligibility based on predefined criteria, ensuring a fair and efficient evaluation. Overall, this innovative solution offers convenience, speed, and efficiency, providing merchants with immediate access to funds while streamlining the lending experience.
At South Indian Bank, the Online Trade Finance module facilitates trade finance-related transactions without branch assistance like host-to-host banking for easy bulk fund transfer facility, supply chain finance programs through Vayana platform, co-lending technology platform with Yubi, formerly known as CredAvenue.
Capital Small Finance Bank has been working with various digital solution partners for modernizing the existing processes in a new fashion which keeps on enhancing day by day. At very affordable rates, many technologies and fintech partners have emerged in the market which have automated PID verifications, fraud management, bank statement analysis and financial statement analysis, and many other solutions like payment gateways, lending scoring, etc.
Aseem said: “We have set up an in-house development team to cater to the daily digital needs. The bank is ready and eager to walk with the changing digital journeys and make the paths more smoothen for the internal as well as external customers.”
Modhumoti Bank is using internal resources and two other fintechs for credit scoring (Nano Loans) and documentation (SMEs). Onboarding and appraisal are still done in the manual process except for agri loans through digital points.
Part 6: A flurry of inhouse applications
SME heads discussed in-house developed applications for SME lending for functionality, cloud, containerization, APIs, data sources, etc.
Nabil Bank Credit Scoring Model through Nabil Sajilo Express Karja is a new innovative model to replace the traditional approval system. It is in-house developed application that was very crucial to improve the TAT of the approval. Further, online loan applications through websites have also been developed in-house. The internal risk rating system, MIS, etc, too have been developed in-house which has helped the bank in the smooth processing of credit proposals.
After the integration of BPMS software through a fintech partner for loan processing, Nabil Bank has integrated various other in-house developed features to enhance the credit appraisal process. The business Site Visit Report (BSVR) and Collateral Site Visit Report (CSVR) which used to be completed in Word document after the visits, have also been incorporated in BPMS for one window solution for credit documents.
Nabil Bank is also working on creating a mobile app for the same, which will soon be linked to BPMS for remove duplication of work for credit officers. Moreover, Nabil Bank is in the process of incorporating the Deals in Pipeline (DIPs) in its BPMS Software to track and monitor the SME leads. Nabil Bank plans to analyze the DIPS data to monitor rejection reasons, identify sectors with high potential, and develop strategies accordingly.
Niraj says: “Nabil Bank has adopted digital memo approval software for smooth and efficient operation of the branches and departments where credit memo and other operation memos have further been segregated for the easy approval process.”
Eastern Bank is yet to develop in-house applications for SME lending, but it is in the early stages of working on projects to complete digitized loan application processes for customer convenience.
Capital Small Finance Bank has always tried to cater to the daily needs of the MSME clients through the in-house development team of the bank. Aseem adds: “The MSME space is very vast and there is a lot of scope for efficient solutions. The bank has developed and has been progressing for various new solutions for smoothing the SME lending processes including collection solutions for educational institutions, self-service portal for data/document collection from customers, digital onboarding, etc.”
As per Kamrul, for SME lending, the process is still manual excepting a few processes. It are in the process of developing in-house software to be used as an end-to-end solution for SME and retail banking.
At South Indian Bank, SMILE implemented as part of the BPM solution by the in-house development team, improving our credit underwriting processes. It includes the data capture modules, business rule engine, and system-driven sanction order generation mechanisms. There are several other minor and major applications developed by in-house teams to support legal scrutiny reports, documentation hub activities, pre-disbursement, and post-disbursement compliance activities.
As can be seen, the banks are doing a substantial amount of in-house development to automate business processes and improve efficiency.