Transcript The SME Challenge May 10th 2005 (Pakistan) Outline       Why SME Why Now Business Model Citigroup & SME Role of Government Conclusion.

The SME Challenge
May 10th 2005 (Pakistan)
Outline
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Why SME
Why Now
Business Model
Citigroup & SME
Role of Government
Conclusion
Why SME?
 For The Banking System SME Represents
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A Large & Growing Opportunity
 Emerging Markets Banking Revenue Estimated At Over $40Billion
 For Policy Makers – It Is A Means To Achieve
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High Employment
 Employs Over 50% Of Labour Force Even In The Developed World
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High Economic Growth
 50-60% Share of GDP – Engine Of Economic Growth
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Culture Of Entrepreneurship
Wider Tax Base
Alleviation Of Poverty
Why Now?
 Economic Liberalization (Last 15 Years)
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Declining Public Sector Role
 Privatization Of Power Sector, Oil & Gas, Telecommunications & Other Industries
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Emergence Of Private Enterprise As The Engine Of Growth
 Central & Eastern Europe, China, India, Pakistan
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Increasing Regional Economic Cooperation
 ECC/EU, NAFTA
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A “Freer” Trade Environment
 Reducing Trade Barriers (Tariffs)
 Privatization Of Banks
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Entrepreneurial & Performance Driven Management
Increasing Product Sophistication & Better Risk Management
Improving Cost Management & Operating Efficiency
 Banking Reforms
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Improvements In Legislation & Legal Infrastructure To Protect Rights Of The
Lenders
What Is SME?
 Various Definitions
 Defined
By Size Of Sales Or Number Of Employees
 Depends On Size Of Companies Relative To Economy
 EU
Less Than 250 Employees & Sales Of Eur 50Million Or
Balance Sheet Of Eur 43Million
 Citigroup $2-$50 Million In Sales [Up To$250MM In Some Countries]
 Differentiating Features
 Owner/Family
Managed
 Proprietorships, Partnerships Or Small Private Or Public Limited
Companies
 Generally Suppliers To Larger Local Or Multinational Companies
 Low Capitalization & Limited Financial Strength
 Needs A Mix Of Consumer & Corporate Banking Products
SME - A Hybrid?
Corporate
SME
• Large & sophisticated
relationship managed multiproduct customers (need
investment banking/corporate
finance, derivatives and other
high value added products along
with traditional banking
products).
• Upper tiers need relatively wider
product set similar to the larger
corporate entities.
• Lower tier, clients needs cut across
boundaries of traditional consumer
and corporate banking products.
Micro
SME - Segment Needs
SME
SME
Individual In Business-I Individual In Business-II
SME
SME
Partnership
Limited Company
Sub-Segment
A
B
C
D
Sales Size
$0-$2 Million
$2-$10 Million
$10-$25 Million
$25-$50 Million
Stage Of Business
Leverage Personal
Stand Alone Business
Rapid Growth
Growth
Assets
Typical Collateral
Product Needs
PERSONAL Mortgage &
PERSONAL Mortgage &
BUSINESS Mortgage &
BUSINESS Mortgage &
Asset Backed Finance
Asset Backed Finance
Asset Backed Finance
Asset Backed Finance
Deposits
Deposits
Cash Management
Cash Management
Insurance
Insurance
Insurance
Insurance
Credit Cards
Credit Cards
Credit Cards
Credit Cards
Working Capital Loans
Working Capital Loans
Working Capital Loans
Trade Services
Trade Services
Trade Services
FX
FX
FX
Venture Capital
Venture Capital
Advisory
Advisory
IPO
Corporate Finance
M&A
Corporate
Business Model
The Challenge Of Managing Scale & Diversity
Elements of the Business Model
 A Full Service Relationship Bank
 A Customer Relationship Organization
 Not A Product Organization
 Serving All Our Customer Needs
 We Manage Our Credit Risk Through
 Differentiated Processes Based On Size Of Exposure
 Our Transaction Processing Aims To Lower Unit Cost Through
 Use Of Technology
 Specialization & Centralization Of Functions
The Business Model
Target Market Definition
 Key To Long-Term Success
 Should Be Able To Weather Economic Downturns
Business Drivers
Separation Of Customer Acquisition
& Management
 Key To Managing Large Volumes &
 Improving Returns Through Cross Sell
Differentiated Risk Process
 Exposure Based
Low Cost Processing
 Of Small Ticket & Large Volumes
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Customer Acquisition & Attrition
Product Cross Sell
Low cost Funding Of Portfolio
Management Metrics
Expense Management
Low Cost Processing
Electronic Banking Platforms
Risk Management
Single Obligor
Approach
Tailored Approach
 Some Product Tailoring To Meet Specific Customer Needs.
 Secured & Unsecured Cash Flow Based Lending
• Obligor Risk Rating Models - To Differentiate Credit Risk
Credit Program Approach
Credit Program
Framework
Large
Exposures
Medium Sized
Exposure
Small
Exposure
Exposure Based Risk Architecture
Managing Scale - Credit Risk Management
 Broader Product Range
(Trade, Generally Short Term loans, FX)
 Mostly Secured Lending
 Rating Or Scoring Models
 Some exceptions allowed based on grading of customers
Credit Factory Approach
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Highly Standardized Approach
Standard Products (Trade, Generally Short Term loans, FX)
No Exceptions & Limited Product Range
Delinquency Managed
Scoring
Citigroup – Commercial Banking
Citigroup Commercial Business
$66 Bn
Assets
$ Billion
70
$56 Bn
Assets
60
50
40
30
20
10
0
2003
2004
Global but Selective Presence
Americas
CEEMEA
Asia
USA
Poland
Korea
Mexico
Czech Republic
Malaysia
Chile
Slovakia
Thailand
Brazil
Turkey
Singapore
Hungary
Taiw an
Pakistan
Hong Kong
Romania
India
China
Role Of Government
As the EU sees it
Governments As Information Provider - Statistics in Focus
 Statistical Databases
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Default History
Ownership Details
Detailed Annual Financials
Financial History Of All Registered Companies
Number Of Employees
Industry
 Available In Most Of CE Countries
 Poland, Hungary, Czech, Slovakia
 Largely Available In Turkey
Governments As Facilitators
 Help With Cheaper & Faster Start-Ups
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One Stop Shop
Simplified Application Procedures
Online Registration Of Businesses
 Access To Markets
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Domestic
 Reduced Requirements For Participation In Government Tenders
 Targets For SME Participation In Government Procurement Of Goods &
Services
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International
 Information On International Opportunities
 Education On Key Success Factors In The International Market
 Help Participation In Trade Fares
 Education & Training Resources To Develop
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Entrepreneurs
Adequate Supply Of Skilled Human Resources
Governments As Funding Support Providers
 Grants
 EU Grants Under Various Programs
 Availability Based On Screening Criteria & Priorities
 Subsidies To Financial Institutions
 SME Credit Risk Remains With The Banks
 European Investment Bank (EIB) Provides Subsidized Balance Sheet Funding
To SME Banks
 EU Monetary Incentives To Banks – Up To Euro 5000 Per Deal Booked For
Qualifying Transactions (Eur 40K To Eur 500K)
 Credit Support/Guarantees
 Partial Credit Risk Sharing - Up To 80% Of First Loss - Generally Through
Portfolio Risk Insurance
 Insurance Cover For Receivables.
 Venture Capital Funds
Governments As Business Enablers
 Taxation
 Simplification & Reduction Of Tax Compliance Procedures
 Incentives To Encourage Earnings Retention & Balance Sheet Growth
 Flat tax ?
Conclusions
Some Take Aways For Lenders
 Strong Target Market Definition
 Key To Building A Balanced Portfolio & Reducing Credit Losses
 Separation Of Marketing, Sales For Managing Scale
 Focus On New Customer Acquisition
 Maintaining Existing Customers &
 X-Selling
 Management By Metrics
 Well Defined & Well Communicated Parameters
 Differentiated Credit Process
 An Efficient System Demands Differentiation In Credit Maintenance
Process Based On Exposure/Risk Being Taken
 Low Cost Transaction Processing
 Small Ticket Size & Large Number Of Transactions
 Technology Based & Centralized Transactions Processing
And Points For The Government To Consider
 Bridge The Information Gap
 Help With Cheaper & Faster Start-Ups
 Help Increase Supply Of Financing For SME
 Facilitate Access To Markets
 Enhance Education & Training Resources