Small and medium-sized enterprises lending approaches : the role of banks in Asia

Abstract

SME Lending should never be confused with microfinance. At the other end of the lending spectrum, SME lending also differs from corporate lending - primarily for the additional risks it presents. This paper outlines the risks to the lender and offers practical approaches for their mitigation. At the centre of the “solution” is a firm reliance on sound credit analysis, and how lack of financial information may be rectified. In an age of alternative sources of finance, the paper explores algorithm-based platforms, describing both their strengths and their weaknesses. A “third way” is proposed, which combines traditional financial statement analysis with a semi-automated approach. Key to the proposal is retaining adequate analytical rigour while cutting costs to the lender and enabling fast turn-around time for SME loan applicants. The elements of a successful SME lending program are described in detail, including loan products, monitoring, regulatory issues, the role of loan guarantees, and marketing recommendations. The paper concludes by examining how three Asian banks, each a leader in its market, have made SME lending an integral part of their respective missions.