Banks Target SMEs by Digital Lending

Caucasus SME Banking Club Conference 2019

SMEs and MSMEs are the backbones of most economies. It is these small businesses who keep an economy functioning, providing employment, maintaining liquidity flow and developing an entrepreneurial spirit. Meanwhile, 40% of SMEs globally have an unmet finance need. Those lenders who realize the importance of SMEs are not stagnating and try to target them by providing SME friendly services, like digital lending and unsecured credits.

“40% of SMEs globally have an unmet finance need. SMEs are engines of job creation and economic growth, but lack of finance is creating USD 12 trillion market opportunity,” said Aksinya Sorokina, Global SME Banking Specialist at IFC, the World Bank Group.

Aksinya Sorokina
Aksinya Sorokina, Global SME Banking Specialist at IFC, at Caucasus SME Banking Club Conference 2019

Sorokina believes that with co-operation and action by governments and the private sector, closing this gap for small business is achievable. “SME banking can be the most profitable business segment for commercial banks. IFC’s SME banking global benchmarks estimate that a best-in-class ROA for the SME portfolio is around 5%, compared to the total bank’s ROA of 4%. This includes compounded average annual growth rates on SME assets and liabilities of approximately 25%-30% for a best-in-class bank, compared to 20% percent for the total bank’s assets,” she said.

According to Sorokina, collateral requirement remains one of the key challenges for SME finance. And in response to that obstacle, Ukrainian Raiffeisen Bank Aval has launched unsecured lending for SMEs.

“The practice of SME financing looks similar on different countries. It might be because every business client wants similar thing: get funds for developing of its business. So, accordingly banks might be there to assist such clients to develop their business, because it is very hard for clients to generate funds for their businesses. And this difficulty mostly occurs to small entrepreneurs and start-ups. It takes them years to generate finances required for the growth of their business and they cannot provide collateral which is generally required at SME financing. So, for such customers we are offering credit products that are fast and do not require collateral. It allows customers to finance daily operations and make small investments. Of course, this will not be large equipment or mortgage, but it will allow purchasing some machinery and lower cost equipment for improving their business,” said Oksana Kutsokon, Head of Business Banking at Raiffeisen Bank Aval.

Oksana Kutsokon
Oksana Kutsokon, Head of SME at Raiffeisen Bank Aval, at Caucasus SME Banking Club Conference 2019

Unsecured lending did not increase risks for Raiffeisen Bank Aval. “Honestly, we would not launch such product if we have seen it was risky. I have spent ten years at risks, so I am well aware of risk control,” Kutsokon explained.

The reason why Raiffeisen Bank Aval decided to offer unsecured crediting was because some systems and opportunities appeared that allowed the Bank to control this risk. “The changes of regulation rules that have been implemented during recent five years in Ukraine, give us an opportunity to make data information accessible, open and transparent. The Bank started successfully using it and opened new opportunities to its customers. So, while the government permits the usage of this data, banks have a chance to make low-risk crediting, which is a win-win process for everyone,” said Kutsokon.

The share of delay of unsecured loan at Raiffeisen Bank Aval is only 1.5%. As Kutsokon explained, normally, 2% of delay at unsecured lending portfolio is suitable. So far 1.5% is a big success for the Bank. She believes, that the given low default rate is the direction that should be acquired by banks.

During recent two years Raiffeisen Bank Aval has been increasing its SME sector crediting by 50%. And as Kutsokon said unsecured lending played a big role in this growth. She expects this trend to continue this year and predicts to reach 30-40% growth of their portfolio.

Samir Mustafayev
Samir Mustafayev, Head of corporate business development department at Unibank, at Caucasus SME Banking Club Conference 2019

Next to the absence of collateral, digital lending becomes one of the key requirements of SME sector. It is well expressed at an example of Azerbaijani Unibank. “The share of online lending has been growing from month to month. The figure was 6% in October 2018 and reached 11% in January 2019. The tendency of growth developed further and shared 18% in March 2019,” said Samir Mustafayev, Head of corporate business development department at Unibank.

Unibank offers online lending in 15 minutes.

“There are five main stages which we consider during online lending: client’s background, appropriate settlement of the turnover, personal manager, fully automated process and minimum document turnover,” said Mustafayev.

Igor Barkhatov
Igor Barkhatov, Head of SE and entrepreneurs’ risk modeling at Sberbank, at Caucasus SME Banking Club Conference 2019

Crediting entrepreneurs with minimum involvement of entrepreneurs – this is a future tendency of banking according to Igor Barkhatov, Head of SE and entrepreneurs’ risk modeling at Sberbank.

“We are observing a trend of lending process going online. New technologies, new data is used and we are following this trend. We think that in total, we will be lending entrepreneurs with their minimum participation. We will collect everything instead of them, will calculate it, decide when and how much credit they need and will provide it,” said Barkhatov.

“Simply and fast – this is the main demand of customer. Clients have simple request, to take credit without filling in and submitting something.  So, simple and fast products will become more demanded,” Barkhatov added.

Recently, Russian tax office started strict control of cash flow and black market turnover, said Nikita Abramenko, CEO at Potok. Accordingly, electronic transactions started significantly boosting. Looking ahead, Abramenko predicts the death of old approach of SME sector towards its organization manner.

Nikita Abramenko
Nikita Abramenko, CEO at Potok, at Caucasus SME Banking Club Conference 2019

As for the future of SME banking, Abramenko foresees a bigger competition in lending. “Previously banks were competing for attracting more customers for settlement and cash services. Currently, they are competing at crediting and I expect the growth of competition at this segment within the following years. Crediting is quite good as it connects a customer to the bank for a long time,” said Abramenko.

Another trend distinguished by Abramenko, is that the banks are trying to become a marketplace, transforming into personal financial management, offering various bonus systems for club members, kind of a cross-selling. In future, he expects that banks will place SMEs in the spotlight.

“At present we are financing small entrepreneurs in accordance to their transactions. So in a longer run banks will rely on mass data sources of SMEs, like how they are procuring goods from suppliers, what is their attitude towards debiting, their court and arbitration processes,  what is the feedback of employees or partners. So, all these collected data will provide more relevant and accurate, quick-acting crediting,” Abramenko told.


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