IFC Study Identifies Best Practices to Help Banks Improve Services for Small and Medium

Enterprises

IFC has released the results of a global study that identifies best practices for banks that provide
services to small and medium enterprises. The study, Benchmarking SME Banking Practices, was
launched at the Felaban banking industry convention in Miami. It discusses trends in SME banking
and is designed to help financial institutions improve their services to entrepreneurs and small
businesses.

The IFC study highlights the growing importance of SME banking to participating banks. It also
indicates how leading banks have managed to adapt their business models, organizations, and
processes to serve their SME customers better and optimize the performance of their SME
operations.

“The financial needs of smaller businesses are often underserved, which can be a constraint to their
growth. The results of this study suggest that banks increasingly recognize the opportunities that
SME banking offers,” said Ary Naim, IFC Senior Financial Specialist for Global Financial Markets. “The
lessons revealed here should encourage more banks to enter the market and help financial
institutions improve their banking services.”

The study, which began in 2005, benchmarks SME banking practices at 11 banks across developed
and emerging markets. It identifies competition in corporate and retail segments as a key factor that
drives banks to offer services to small businesses. It also shows that SME banking is proving to be
profitable, generating a higher return on assets than total bank portfolios.

The study finds that senior management commitment and focus at the operational level are both
crucial factors in the success of SME banking. It also emphasizes specialization among participating
banks, which typically employ dedicated small business staff.

IFC will continue to work to establish best practice in SME banking in emerging markets by sharing
the study with all banks seeking to benchmark and improve their practices. IFC has recently launched
a micro, small, and medium enterprise program in Latin America and the Caribbean, which is
designed to support financial institutions through a combination of financial products and advisory
services. These efforts will help the institutions expand their services to MSMEs, while being
profitable.

Small and medium enterprises (SME) present banks with huge untapped business potential

A study on the financial profiles of SMEs, carried out by CRISIL, comparing the financials of 32,000
SMEs with over 2500 large corporates provides compelling evidence that there are a large number
of creditworthy SMEs. For banks, the sector thus represents tremendous untapped business
potential.

Crisil study reveals that 50 per cent of SMEs have debt-equity ratios of less than 0.34, and interest
cover of over 2.24 times. This is contrasted with large companies, where the respective debt-equity
and interest cover levels are 0.73 and 2.63 times.
CRISIL believes that a reason for the low level of indebtedness could be the non-availability of
financing at attractive rates, due to a misplaced perception of high credit risk in the SME sector.
Moreover, there is wide variation in financial profiles between the top half and the bottom quartile
of SMEs; therefore, financially strong SMEs can benefit greatly by proving their superior
creditworthiness through ratings.

According to CRISIL, business success of so many SMEs, some of whom have gone on to make IPOs in
recent months, points to the potential of this sector. For a lender, the capability to distinguish
between strong and weak credits through credit ratings will be the key to successful participation in
this sector’s growth.

Given the wide variation in financial strength across SMEs, CRISIL believes that reliable and robust
measures of credit quality, fine-tuned to the sector’s requirements, are essential tools for lenders to
the sector.