Why Asian banks must revamp their SME divisions

The latest strategy to aggressively grow unsecured loans to the SME segment, underpinned by the hopes of earning mega bucks to make up for the falling margins is bold but could well be the cause for the next disaster.

Nothing wrong with bold strategies so long as qualified managers are implementing them.

Relationship managers entrusted with the execution of the new strategy must be solid with strong risk assessment skills to deliver results. Regrettably that is not the situation here.

SME division of most banks largely comprises of managers who are pathetically under qualified for the job though they may have been top performers in earlier jobs. With no background in finance and insignificant lending experience-from selling personal loan products-how could we expect relationship managers to understand the complex structures, business model and underlying risks in SME business?

How can we expect them to respond intelligently to the impact on the cash flows of the small enterprise caused by changes in market, if they don’t know how to read a balance sheet? How can we expect them to acquire the right-borrowing clients?

Having cast the division with ill qualified relationship mangers, banks and in particular those with lean organization structure-in which one risk officer supports five or more relationship managers-conveniently depend on the risk division for building the SME business and ensuring portfolio quality, while allowing the relationship managers to perform their primary role as hunters and thereafter as messengers.

This equation needs to change if banks are to succeed in their new game plan. Building the SME business has to be the joint responsibility of risk and relationship management. Given the higher risks in SME lending-characterized by the lack of publicly available information and greater vulnerability to the changing market dynamics-pursuing the above strategy before transforming RM capabilities can be catastrophic.

No wonder that a recent study on the subject at a highly profitable bank, concluded under performance of relationship managers, as the primary reason for the divisions poor contribution (under 5%) to the overall profits of the bank.

Banks need to get real and not expect to produce outrageous income from the current organizational set up consisting of managers who cannot produce great results with their mediocre performance. To produce significant results, SME RMs need to transform from good to great; must upgrade their knowledge, acquire superior risk assessment skills and work closely with the risk division.

What makes GREAT managers across the globe different? They possess superior knowledge, solid experience and great understanding the SME business model and underlying risks.

Hence they,

• Build a solid pipeline of strategic fit clients
• Convert potential into business quickly
• Undertake thorough research and make game changing proposals that the prospect cannot afford to turn down.
• Go beyond numbers (balance sheet analysis) to understand the business model of the enterprise before structuring facilities that bring tangible benefits to their customers.
• Negotiate for business from position of strength.
• Write convincing credit proposal
• Constantly review their portfolio and make adjustments early enough based on updated knowledge to avoid surprises.

It is time banks make harsh decisions for recasting the SME division before embarking on bold strategies or pay the price once again. Here are some prescriptions:

• Redefine qualifications for engaging SME relationship managers
• Send the disqualified back to where they belong. They are most likely to thank you.
• Put the rest to rigorous training to upgrade skills/ capabilities
• Factor the cost of hiring high performance managers in your next projections rather than going to board for approving loan losses produced by ill qualified RMs.