A.T. Kearney on growing SMEs

  • Business
  • Friday, 03 Oct 2003


MANAGEMENT consultant A.T. Kearney, Inc sees small and medium scale enterprises (SMEs) lending to be a key driver for growth in the Malaysian banking industry and offers significant opportunities to banks, according to vice-president and head of financial institutions group for South-East Asia and India, John Meinhold. 

“There is significant potential for loans growth to SMEs as they only account for 30% of total loans while SME-related sectors consistently account for over 50% of the Malaysian economy, with manufacturing taking up the biggest share,” he said at a breakfast briefing on Critical Success Factors for Growing the SME Business in Malaysia, organised with Institute of Banks Malaysia in Kuala Lumpur on Tuesday. 

Meinhold said Bank Negara, recognising the importance of SMEs to Malaysia’s economy, had established a holistic framework for their development, strengthen the infrastructure for SME development, enhance access to financing, and build the capacity of domestic SMEs.  

John Meinhold

Commercial banks, however, still face much difficulty lending to the sector as the underlying fundamentals of the risks associated with the SME market have remained unchanged, according to Meinhold. 

This was because SMEs had limited assets and insufficient collateral required for loan application, and they lacked management efficiency and effectiveness, he added. 

In the eyes of most financial institutions, these factors are strong reasons to doubt the credibility of SMEs and their ability to honour their loans.  

To avoid time consuming and expensive bankruptcy process in the event of loan default, some financial institutions simply do not lend to SMEs. 

Based on the firm's experience, Meinhold said there were four key dimensions for banks to successfully grow their SME business in Malaysia – appropriate segment strategies, tailored sales and distribution model, sound credit management, and an efficient operating business model.  

“Segment the SME market into small-end and larger-end and develop risk tools applicable for each of these segments. That's the main thing the banks need to do, to understand how to handle the risk side of lending to SMEs. Then they would need to look at how to manage their SME-lending business more efficiently.  

“That is the biggest problem that banks have. What they need to do is look at the way they sell and service in a more efficient way like using their call centres to do telephone marketing and after-sales service,” he said. 

Meinhold said that as SMEs had a higher risk, banks should be able to price their loans (interest and fees) to recover any loss as an incentive to continue lending to the SME market. 

“SMEs have a higher probability of defaulting and higher loss-given default because of the lack of collateral. We are concerned that most of the banks in Malaysia do not understand what the risks and the cost of risk actually are when such loans default,” Meinhold said. 

He further stressed that banks must build up the capability to assess the risks and the cost of capital when lending to the SME market. 

As to whether the SME market would still be a lucrative business to go into, Meinhold said much depended on the banks, how they segmented their market, who their target customers were and their ability to assess risk. 

“We are concerned that a lot of the lending to the SME market is potentially unprofitable to banks, given the cap on the base lending rate.  

“Therefore, it is important to understand each customer and whether it is profitable or unprofitable to lend,” he said, adding that loan monitoring would also play an important part. 

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