Executive Summary
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Banks consider SMEs to be core strategic businesses with a high profit potential.
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To serve SMEs, banks are now establishing separate dedicated units, standardized processes, and risk-management systems.
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The relationship manager’s role is crucial for attracting new customers, and selling products to existing SME customers.
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Banks are increasingly serving SMEs through different transactional technologies. which emphasize cross-selling.
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Large, multiple-service banks are the main players in the SME market.
Introduction
A common perception is that small and medium-sized enterprises (SMEs) cannot access appropriate financing. This perception is often supported by academic and policy circles’ “conventional wisdom” that banks are generally not interested in dealing with SMEs, mainly due to SMEs’ perceived opaqueness1 and higher informality.2 As capital markets do not compensate for these deficiencies in the banking sector, the need to receive special assistance, such as government programs to increase lending, has been suggested.3 In recent years, SME financing initiatives included government-subsidized lines of credit and public guarantee funds.4
In the academic literature, there is evidence that banks (especially small and niche players) engage with SMEs through relationship lending. Relationship lending can overcome opaqueness due to the primary reliance on “soft” information gathered by the loan officer through continuous, personalized, direct contacts with SMEs.5 However, in a series of studies recently conducted by the World Bank, new stylized facts point to a gap between the conventional view and the way banks are actually interacting with SMEs.6
First, new evidence suggests that most banks, including large and foreign banks, indeed serve SMEs, finding this segment very profitable.7 Second, different transactional technologies that facilitate arms-length lending (such as credit scoring and significantly standardized risk-rating tools and processes, as well as special products such as asset-based lending, factoring, fixed-asset lending, and leasing) are increasingly applied to SME financing (Berger and Udell, 2006). Third, banks try to serve SMEs in a holistic way through a wide range of products and services, with fee-based products rising in importance, placing cross-selling at the heart of their business strategy.
Under this new model of bank engagement with SMEs, larger, multiple-service banks exhibit, through the use of new technologies, business models, and risk-management systems, a comparative advantage in offering a wide range of products and services on a large scale, becoming leaders in this business segment.
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