By Amitabh Verma
SMEs are the engine of growth for any economy. They are the first to run - up when the going is good and often amongst the first to feel the stress when the markets turn the heat on them. While SMEs have several challenges to deal with (management skills, bandwidth, talent, dependency on buyers / suppliers etc), the key challenge often is access to "funding" which can insulate them from these.
SMEs typically do not have "deep" pockets. This makes them more vulnerable to shocks from the market. As liquidity gets tighter in the current economic scenario, the cost of funding (even when it is available) also tends to go up, adding to the strain. However, adequate and timely funding is the life blood for SMEs and is often the key differentiator which can take these SMEs to the big league.
The key challenges for an institution or a bank is to find the "right" SMEs who can manage the stresses of the current tough environment. There is appetite for financing the good SMEs but selection becomes a deterrent. There is a need to bring in Risk Management tools which study the entire eco - system of the SME and not merely its financials. So, the fundamental question which comes back to the table is what are the key risks and how do we mitigate them?
Some key aspects of assessment which could provide a holistic view would include:
• Getting to understand the Promoter - SMEs are typically promoter driven. Understanding the knowledge, experience and integrity of the promoter is key to understanding how the company is likely to behave.
• Succession Plan - Once the lender knows the promoter and is comfortable, they need to be sure that the best laid plans would be executed, should there be any disruption in business. A well articulated succession plan helps the SME remain a "going concern" even in turbulent times.
• Market feedback - Does the market think the company as trustworthy? It makes sense to do as many buyer/ suppliers /stakeholders checks and feedback as possible because it gives a 360 degree view on the client.
• Business Model - The lender also now needs to understand what exactly is the SME doing? Is the business model viable and sustainable? Can the SMEs USP help them grow?
• Dependency - Is the SME dependent on the large industry players? Are there any likely implications? Can these be mitigated?
• Competitive and Market scan - How is competition reacting? Are bigger players likely to crowd out the SME OR would the SME be able to carve out a place for themselves?
Once the lender has gone beyond the financials to look at the SME holistically, the decision on picking the "winners" become a lot simpler. SMEs need funds and so do the financial institutions/banks need to lend and a win-win synergy can be created.
Amitabh Verma with an experience of over 15 years in the banking space heads the SME Banking business of DBS Bank India. He can be contacted at - firstname.lastname@example.org