Small Business Lending Focus

SME Lending is being pushed across the globe today. The reason why this important segment was ignored till date is Bank's perception of SME Loans being riskier than rest of the lending areas. Lending to Large and Multi National Corporations  and Retail lending has climbed its curve and now on a decline path , from point of view of saturation as well as profitability.

The recent credit crisis has illustrated the over-exposure of banks to areas like retail lending.

 Around 90% of the SMEs worldwide rely on informal means for credit, they are the conventional moneylenders and credit guarantee shops and credit unions set up with the help of government. Governments in region like Asia have been pushing the concept of small business lending since decades. Now they are pushing even harder as they realize the retail lending markets will take another turnaround before they come back to their profitability curve. Countries like India, China, and Russia are now devising ways through which the banks feel more and more comfortable to lend to this segment.

Specialist credit bureaus, support from credit guarantee corporations and formulating intelligent credit scoring models will provide an impetus to the Small Business Lending.

This sector of Lending is particularly important for developing economies, where the big cooperates are constantly challenged by multinational competition from the globe, the margins are thinning in today's flat world for giant businesses. While on the other hand small business has the advantage of lesser competition from multinationals. Most small businesses have competition from their domestic counterparts and funding to these businesses will help these smaller businesses overcome the issues of scale and market opportunities.

Not only that early funding and financial support to these businesses will multiply the chances where they can enlarge themselves into larger players and consolidate with their competitors, and provide formidable challenge to the international competition, if any.

Having said this, risk of funding an ailing business still remains. Careful use of the following sources can contribute a great deal to a lending decision:

> Customer’s credit history and legal background

> Financial Reports and cash flow projections

> Economic and Industry Data

> Personality and Culture

The SME Business Plan should be clear, concise and comprehensive, containing key sustainable information on the following:

Management

Product or Service

Markets

The Business

Financial Projections

Finance Required

Security available

Management Information Systems

Additionally, automated credit scoring based on above parameters can assist great deal in handling volumes as well as ensure quality credit decision making. However the responsibility of Credit decision relies on a carefully designed credit policy, rather than an automation system that simply qualifies the information.