- The default risk in lending to SMEs is always considered high as compared to the large corporate lending. What are the early warning signals which if caught timely, can reduce the probability of SME Credit default?
I have often maintained that it is easier to lend a Billion rather than a Million, because usually in lending a Billion you have good corporate governance, a professional balanced board of directors and fully audited financial statements provided by a large, independent audit firm. You also usually have, steady substantial cash flows and a strong balance sheet to guarantee any loan. With SMEs however the information can often be opaque, provided by a management team with less financial or external expertise and where there tends to be an over concentration of decision making in the hands of a small number of individuals. There is nothing wrong of course with lending to SMEs, we just need to be careful with credit risk management. As a banker, it means keeping your eyes and ears open and being true to the principles of good credit management and risk mitigation, which also means not cutting corners in your credit risk analysis.
Spotting early warning signals and taking corrective action to avoid default is therefore a very important part of credit monitoring and management. The earlier we spot a problem, the more time the banker has to work with SME management to find a solution to that problem. Time is very much of the essence which is a core message that we try to spread in our early warning signals course training.
In my experience most problems arising from SMEs are associated with the actions of management, whether that is poor liquidity management and overtrading, to paying excessive dividends and failing to build the equity base of the company to allow for further future growth. Identifying any defects in management, such as a lack of experience or capabilities as part of the credit due diligence process is therefore extremely important. Management behaviour can be a prime leading early warning signal during times of crises. If management is not responding to your requests as a banker, you have to ask yourself, why not.
2. In light of COVID 19 crisis, banks need to reorient their SME offerings for compliance with the new rules and to address small businesses liquidity challenges. With increased business uncertainty, government interventions facilitating loans repayment deferrals, traditional data sources may be insufficient for a comprehensive risk assessment of SME, what are the alternative data that SME Specialists are depending on globally to augment their risk assessment capabilities and build robust early warning systems (EWS)?
The current COVID 19 crisis has been particularly damaging to the SME sector, not only in Egypt but across the world. The support packages provided by the Government and the Central Bank of Egypt have been very useful in helping SMEs to survive the current crisis but of course, no government anywhere has limitless resources and governmental support initiatives cannot go on indefinitely. In the current climate, SMEs that have sufficient liquidity to continue paying their operating costs will hopefully survive this crisis, but we are racing against time. Since April 2020 we at JBS Training & Consulting have been working closely with our SME clients to find ways to generate liquidity through their working capital management and from support from their bankers and shareholders.
From a banker’s perspective working with SME clients to understand how they are managing liquidity and watching their operating accounts closely, can give bankers a good understanding of their client’s continue viability during the crisis. That includes looking at weekly cash flow statements of cash coming in and out of the company. Real time cash management and ongoing communication will help bankers and SMEs to steer a course through this crisis.
3. Technology-led innovations have become the backbone of modern banking and have triggered significant structural and behavioral changes across SME customers especially after COVID 19, what are the most important contactless banking solutions that can enhance MSME customers digital experience, offer cost efficiency and lower turnaround time?
I agree that technological innovation in banking has served both the banks and SMEs very well over the past year in both increasing risk control for bankers and enabling SMEs to continue funding operations, paying employees, servicing clients and paying suppliers efficiently. I believe that automated payment systems have certainly enhanced the speed and efficiency with which SMEs can service their clients. They have also allowed bankers to improve the monitoring of SME payment systems and have allowed them to assess more accurately the financing needs of their own clients.
One major development in SME financing in western markets including the United Kingdom, arising from the widespread use of digital banking, has been the creation of pre arranged working capital financing. In these cases banks are able to offer working capital financing limits to clients on an automated basis without the prior request of SME client management or highly detailed and time-consuming due diligence. This has been possible thanks to digital transformation and the centralisation of credit information about client companies at national level, which has allowed bankers to review the credit status of their SME clients through an independent credit review. This certainly offers cost efficiency and also removes turnaround time.
4. How are you assessing the progress of digital transformation in SMEs lending in 2020 and 2021?
I believe that despite the acceleration of the digital transformation of SME banking, a major challenge for bankers in the current period has been the lack of direct human contact with SME management, which is essential to fully understanding the progress of the SME’s business in surviving the COVID crisis. I would therefore encourage the incorporation of digital technology in regular, if not daily communication, with SME management. Sharing information in real time and ‘looking management in the eye’ through the use of digital online platforms such as ‘Zoom’ can go a long way in replacing that essential human contact.
Technology has brought great efficiencies to banking and has allowed the implementation of standardized credit rating models and automated credit approval systems. However, I do fear that an over reliance on technology is destroying the banker’s professional analytical skills in credit risk mitigation and management. ‘Computer says no’ is not a satisfactory answer to SMEs facing nuanced challenges in the current COVID crisis. Furthermore, from a banker’s perspective they cannot rely fully on technology in credit risk analysis until it can detect honesty and trust in a client’s management.
5. To which extent the limited maturity of some of these technologies in developing countries can increase the challenge of properly serving retail and SMEs customers through banking services?
It strikes me that there remain two major bottlenecks to the successful roll out and application of digital technologies in banking across developing countries. The first continues to be a degree of scepticism from SME management regarding the security of digital banking while the second concerns poor internet connections in rural areas and poor band width in cities. Before you think this is a particularly Egyptian problem, I have found that two of the worst places for unreliable internet connections are central London and central Paris, despite recent improvements in internet speeds in the UK capital.
6. Banks need to go beyond financing to support small enterprises, especially during this global pandemic. What is the direct interest for a bank to do this and how can banks build stronger relationships with SMEs?
I would say that at the heart of every successful business is its ability to provide new and innovative ways of satisfying client needs and banking is no exception. By getting close to your client and working with them, you can understand their requirements and provide banking solutions, perhaps even before the client has identified those needs themselves. In any economy, SMEs are the companies that provide the growth, the wealth and the jobs of the future. This is the understanding underpinning various governmental and CBE support schemes for SMEs launched in Egypt in recent years. Helping companies to grow while they are still small, directly allows banks to share in that growth and wealth creation and therefore to profit from these relationships over the long term.
7. What are the new trends/topics/skills that you are focusing on in JBS Training since COVID 19 crisis? Building on the strong partnership with the Egyptian Banking Institute, what are you specially presenting to Egyptian SMEs Bankers in the upcoming period?
JBS Training has developed a highly successful working relationship with the Egyptian Banking Institute over the past ten years in providing SME bankers with a wide range of training subjects. Since the COVID 19 crisis we have also begun to develop specific online courses for SME bankers focused on helping client companies during the pandemic which we will continue to do throughout 2021. These programmes will provide SME bankers in Egypt with practical, applied knowledge in working with client companies to preserve company liquidity, manage operating cash flows and also in identifying early warning signals in SMEs. We launched a highly successful Debt Restructuring course in November focused on how bankers can manage problem loans and distressed debt in Egypt, in the light of Egyptian bankruptcy law 2018. Based on further demand for the subject, we hope to run it again during 2021.
JBS Training has also been working directly with Egyptian SMEs in crisis management during the COVID through various initiatives financed by EBRD in the Egyptian market. This has allowed us to develop an even deeper understanding of the challenges facing Egyptian SMEs currently, knowledge which we bring to our training courses with the Egyptian Banking Institute.