The SME Challenge

1
The SME Challenge

• May 10th 2005 (Pakistan)

2
Outline

• Why SME
• Why Now
• Business Model
• Citigroup SME
• Role of Government
• Conclusion

3

• Why SME?
• For The Banking System SME Represents
• A Large Growing Opportunity
• Emerging Markets Banking Revenue Estimated At
  Over 40Billion
• For Policy Makers It Is A Means To Achieve
• High Employment
• Employs Over 50 Of Labour Force Even In The
  Developed World
• High Economic Growth
• 50-60 Share of GDP Engine Of Economic Growth
• Culture Of Entrepreneurship
• Wider Tax Base
• Alleviation Of Poverty

4

• Why Now?
• Economic Liberalization (Last 15 Years)
• Declining Public Sector Role
• Privatization Of Power Sector, Oil Gas,
  Telecommunications Other Industries
• Emergence Of Private Enterprise As The Engine Of
  Growth
• Central Eastern Europe, China, India, Pakistan
• Increasing Regional Economic Cooperation
• ECC/EU, NAFTA
• A Freer Trade Environment
• Reducing Trade Barriers (Tariffs)
• Privatization Of Banks
• Entrepreneurial Performance Driven Management
• Increasing Product Sophistication Better Risk
  Management
• Improving Cost Management Operating Efficiency
• Banking Reforms
• Improvements In Legislation Legal
  Infrastructure To Protect Rights Of The Lenders

5

• 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 To250MM 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

6

• SME - A Hybrid?

• Large sophisticated relationship managed
  multi-product customers (need investment
  banking/corporate finance, derivatives and other
  high value added products along with traditional
  banking products).

Corporate

• 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.

SME
Micro
7
SME - Segment Needs
8
Business ModelThe Challenge Of Managing Scale
Diversity
9
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

10
The Business Model

• Target Market Definition
• Key To Long-Term Success
• Should Be Able To Weather Economic Downturns

• Business Drivers
• Customer Acquisition Attrition
• Product Cross Sell
• Low cost Funding Of Portfolio
• Management Metrics
• Expense Management
• Low Cost Processing
• Electronic Banking Platforms
• Risk Management

• 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

11
Managing Scale - Credit Risk Management

• Tailored Approach
• Some Product Tailoring To Meet Specific Customer
  Needs.
• Secured Unsecured Cash Flow Based Lending
• Obligor Risk Rating Models - To Differentiate
  Credit Risk

Single Obligor Approach
Large Exposures

• Credit Program Approach
• Broader Product Range (Trade, Generally Short
  Term loans, FX)
• Mostly Secured Lending
• Rating Or Scoring Models
• Some exceptions allowed based on grading of
  customers

Exposure Based Risk Architecture
Medium Sized Exposure
Credit Program Framework

• Credit Factory Approach
• Highly Standardized Approach
• Standard Products (Trade, Generally Short Term
  loans, FX)
• No Exceptions Limited Product Range
• Delinquency Managed
• Scoring

Small Exposure
12
Citigroup Commercial Banking
13
Citigroup Commercial Business
66 Bn Assets
Billion
56 Bn Assets
Global but Selective Presence
14
Role Of Government
As the EU sees it
15

• Governments As Information Provider - Statistics
  in Focus
• Statistical Databases
• 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

16

• Governments As Facilitators
• Help With Cheaper Faster Start-Ups
• One Stop Shop
• Simplified Application Procedures
• Online Registration Of Businesses
• Access To Markets
• Domestic
• Reduced Requirements For Participation In
  Government Tenders
• Targets For SME Participation In Government
  Procurement Of Goods Services
• International
• Information On International Opportunities
• Education On Key Success Factors In The
  International Market
• Help Participation In Trade Fares
• Education Training Resources To Develop
• Entrepreneurs
• Adequate Supply Of Skilled Human Resources

17

• 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

18

• Governments As Business Enablers
• Taxation
• Simplification Reduction Of Tax Compliance
  Procedures
• Incentives To Encourage Earnings Retention
  Balance Sheet Growth
• Flat tax ?

19
Conclusions
20

• 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

21

• 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