Overview of SME in India

Symposium on SME Finance

February 10, 2002

Agenda

 SME Space
 Characteristics
 Definition
 Myths on SME
 Client Acquisition
 ICICI - SME Product Suite
 Summing up

2
Indian view of SMEs ….

 Traditionally defined as:

 Small Scale Industries (SSIs)
 Small Scale Enterprises (traders and services)
 Small Road Transport Organisation
 Professionals
 Focus primarily on manufacturing and less on
servicing
 Concentration on traditional industry - textile,
engineering, jute, auto ancillary

3
Traditional Banking ….

 SME in India characterised by

 Low capitalisation and limited assets
 Geographical diversity and high mortality
 Poor access to capital markets
 Cash intensity in transactions
 Lack of credit information
 Poor financial disclosure on account of tax
issues
 Directed lending based on Central Bank
guidelines
 High risk perception has led to high borrowing
costs
4
Traditional Banking …. Cont.

 SMEs prefer..
 Loyal and lasting banking relationships
 Doorstep banking
 Reliable Service Quality
 Comfort/ Relationship with bank staff
 Proximity to delivery channels
 Low delivery cost
 Combination of personal and business banking

5
The traditional approach has
….
 High asset impairment
 9.5% of the SMEs have been categorised sick
 Largely in the manufacturing sector
 Post implementation of the WTO/ GATT norms
 Textile,and major SME dominated industry have
suffered setbacks
 Exports not able to keep up
 Survival has become difficult without high
protection

6
Overview - Indian SME market
….
 In the last decade SMEs have grown faster
than the overall economy
 SMEs contribute
 95% of all industry establishments
 40% of domestic exports and industry
output
 35% of manufacturing sector
 Industry related contribution has been
declining
 Year 1990 - approx. 56%
 Dominance of service and trade in line with
higher growth registered by service sectors
7
Macro Level Comparison

Macro Economic Variables

In %age FY97 FY98 FY99 FY00 FY01
GDP Growth 7.8 4.8 6.6 6.4 5.2
Industrial Growth 6.1 6.6 4.1 6.7 5.1
SME
12.5
Growth 11.3 8.4 7.7 8.23 7.6
11.3
10

8.4 8.23
7.5 7.8 7.7 7.6
6.6 6.4
6.6
5
6.1 6.7 5.2
4.8
5.1
4.1
2.5

FY97 FY98 FY99 FY00 FY01

GDP Growth Industrial Growth SME Growth

8
Agenda

 SME Space
 Characteristics
 Definition
 Myths on SME
 Client Acquisition
 ICICI - SME Product Suite
 Summing up

9
SME Definition ….
• Difficult to benchmark
across sectors/ industry
• Not a true indicator of
Turnover
capital invested
• Difficult to assign broad
based risk band
• Inconsistency in valuation
• Service/ manufacturing risk
Assets profiles difficult to
benchmark
• Within industry specific to
capital intensive nature of
industry
10
 SME Definition …. Cont.
• Internationally accepted
• Difficult given India’s
labour intensive operations
No. of employees
• Ex. - Swedbank

• Representative of capital
backing business
Networth • Acceptable Risk
categorisation
• Sustainability of business
governed by capital
deployed
11
Agenda

 SME Space
 Characteristics
 Definition
 Myths on SME
 Client Acquisition
 ICICI - SME Product Suite
 Summing up

12
It is generally believed - One
….
SMEs predominantly want credit

13
It is generally believed - Two
…. Cont.
Assets contribute major portion
of Bank SME related profits
 Despite the focus on lending, deposits
generate most SME profits
 Only speciality lenders can consistently profit
from credit alone
 Banks must focus on deposit generation
 Small business lending should enhance or
support the deposit relationship
 Cash Management Services a key product
requirement
14
It is generally believed - Three
..
Brick and Mortar support
mandatory for developing SME
business
 Swedbank, Sweden
 40% of SME clients use tele banking
 35% of SME clients net banking
 Wells Fargo - largest US based lender to SME
 Non branch based delivery
 Centralised hubs for credit operations,
servicing
 Delivery outsourced

15
It is generally believed - Four
….
SME business is not profitable

 US Market
 SME Business follows insurance and
consumer durable, in size terms
 ROE is the highest at 35%
 Validated in the Indian scenario
 Local players have augmented profitability

16
Agenda

 SME Space
 Characteristics
 Definition
 Myths on SME
 Client Acquisition
 ICICI - SME Product Suite
 Summing up

17
 Relationship buildup ….
Step 1
SME relationship through “enhanced checking
Electronic delivery

account”
Step 2
Transaction oriented products the key drivers

Step 3
Subject to satisfactory transaction record, SME
elevated to quasi credit relationship

Step 4
Offer takeout financing

Step 5
Offer regular long term credit

18
Agenda

 SME Space
 Characteristics
 Definition
 Myths on SME
 Client Acquisition
 ICICI - SME Product Suite
 Summing up

19
 SME Business Space ….
Institutional Corporat
SME Liability Standalone E-Finance
Liability e Linked
•SISG portfolio •Dealer Finance
•Customised •Asset universe
•Correspondent •Technology
liability •Vendor platform for
banking •All units with
product / Finance other business
solution products networth of
•Equipment Rs.0.50 crore •SME Portal
•Integrated to •Co-operative Finance upto Rs.50.00
other product Banks - main crore •SME business
suites target universe •Leveraging
•Asset size card solution /
•Suite of Corporate processing
•Fee based relationships Rs.5500.00
revenue model Settlement crore •Settlement
banking •Cross Sell
products •Diverse & Banking
•Web based Liability operations
delivery products undifferentiat
•ATM sharing / ed •Factory
•Customer remittance •Infinity processing for
interface products Products •Shift them on
liability trade finance /
through Call •Liability / correspondent
centre platform
Investment banking
•Minimum Management •Card / web products
Branch use based delivery
•Advisory
products
•Web based
delivery

20
Window to cross sell Liability products …..

The key driver for SME Business

Primary product offering to be

Current Account with wrap around services

Customised offering based on relationships

Centralisation of processes - RPC/ CPC/

processing factory

Client acquisition and servicing thru OBS

structure

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Service & Delivery
Drop Information Processes all
box point
trade related
High value cash Logging requests requests for a
transactions city

Branch Call centre Trade finance

factory
Handles exceptions
Cross sells
Monitors accounts
Processes all
pure credit
related
requests
Account/
Relationship
Customer Credit factory
manager

Provide
For all Information support
transactions Logging backbone for
except high requests all
value cash transaction
requests
ATM RPC/CPC
Services
Internet
“Processing centres*” doorstep
deliveries

22
 Corporate Linked Assets
Institutional Corporate
SME Liability Linked Standalone E-Finance
Liability
•SISG portfolio •Dealer Finance
•Customised •Asset universe
liability •Correspondent •Technology
•Vendor platform for
product / banking •All units with
Finance other business
solution products networth of
•Equipment Rs.0.50 crore •SME Portal
•Integrated to •Co-operative Finance upto Rs.50.00
other product Banks - main crore •SME business
suites target universe •Leveraging
•Asset size card solution /
•Suite of Corporate processing
•Fee based relationships Rs.5500.00
revenue model Settlement crore •Settlement
banking •Cross Sell
•Web based products •Diverse & Banking
Liability operations
delivery products undifferentiat
•ATM sharing / ed
•Customer •Factory
remittance •Infinity processing for
interface products Products •Shift them on
through Call liability trade finance /
centre •Liability / platform correspondent
Investment banking
•Minimum Management •Card / web products
Branch use based delivery
•Advisory
products
•Web based
delivery

23
The universe is ….
 Linked to the “Super
200” companies

 Total estimated
volume - Rs.800-
1000 crore

 The market leader

Citi has a book size
of Rs.300 crore

24
…and the possibilities are
immense
 Low risk given the
support of the Corporate
 Historically low NPAs
 RaROC returns are high
despite the declining
interest yield curve
 High risk return ratio
 Creates cross selling
opportunity within the
Corporate and the SMEs
 Exit barriers are high
once the product is
rolled out
25
Driver of SME assets Corporate linked business ….
Client Acquisition and Marketing
Relationship Managers to identify potential

Appraisal
Pre-approved and parameterised
Delivery
Channel neutral and partly outsourced to
channel partners

Monitoring
Credit Factory - COPS

Servicing
Call Centres, BPO, ICICI Market

26
 SME Universe …. Based on
Networth
SME - Rs. 0.50 - 50 crore
Networth Turnover bracket of
Rs.5 crores upto Rs.
500cr

SME
Univer
se

Limits of Rs.0.50
crores to Rs. 50 crores

Units with networth < Rs 0.50 crores with Retail

27
 Electronic products

Bill Junction Pay Seal Corporate Infinity

Utility bill electronic online transfer/
payments payment system settlement
system

e-banking in ICICI

Business
ICICI Markets
ICICI Direct and Multiplier
online FX, Debt,
ICICI Select web interface
SME Portal

28
29
Other Services .…

 Power-Pay
 Payroll management
 payroll
 retirement
 employee benefit and PF management
 4th party logistics
 PFS loan and credit products
 Insurance - life and non life
 Office products
 Bill payment module
 Financial calculators
30
Other Services .…

 Credit cards
 Forex services
 Tax computation
 Cash flow analysis
 Legal advisory
 Mutual fund advisory
 Personal services - hotel, airlines, traveljini
 Software and other equipment
 Human resources - head hunting services
 Online advertising
 PR Services
31
Agenda

 SME Space
 Characteristics
 Definition
 Myths on SME
 Client Acquisition
 ICICI - SME Product Suite
 Summing up

32
 Challenges Ahead ….

Lower cost of acquisition of clients

Not quite easy !!!

To churn and retain credit worthy clients

Maintain high quality portfolio

Ensure client and product level profitability

Lower transaction costs

Optimise interest and fee based income

33
 We need to ….
Retain existing clients and widen “share of
Lead the SME Pack

wallet” through cross sell

Pre approved selection of credit exposures

Dynamic portfolio tracking

Segmentation based on customer knowledge

Product offering based on customer demand

Branch neutral delivery

Aggressive BPO

Leverage technology to enhance spreads

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SME - The Growth
Corridor
Thank You !!!