Despite playing a significant role in Southeast Asian economies, most small and medium-sized enterprises (SMEs) still have limited access to financing and remain to this day largely underserved by traditional banks.
According to the World Bank IFC’s estimates, there is a US$320 billion SME funding gap throughout Southeast Asia today, meaning that about 51% of the region’s SMEs are currently underserved.
Adding to this have been the COVID-19 pandemic and the measures put in place by governments to contain outbreaks. These have had devastating effects on Southeast Asia’s micro, small, and medium-sized enterprises (MSMEs), causing massive dislocation and highlighting the financial fragility of many of those businesses.
“Unlike some of the larger enterprises that have enough in their coffers to withstand some of these prolonged restrictions in the markets, on average, most of the SMEs out there, have probably about 4-5 months of cashflow to be able to sustain a prolonged lockdown, according to our data,” Khairil Abdullah, CEO of Axiata Digital, a subsidiary of telco conglomerate Axiata Group, said during Fintech Fireside Asia’s latest virtual panel discussion.
“We’re starting to see some of those SMEs starting to temporarily shut because of those restrictions, but also at the same time being forced to definitely shut down … There’s a desperate need from SMEs for financial assistance to sustain their businesses going forward.”
Banks are typically reluctant to lend to SMEs, Khairil said, considering them high risk and low value. Plus, many have not invested enough in digital innovation and business capabilities to adequately serve this market, leaving SME banking revenues open for grab by challenger banks and alternative lenders.
“In Malaysia … banks are not really equipped to serve the SMEs in the first place. In a non-pandemic environment, it was already a challenge … [Now with movement restrictions,] you must change your distribution model,” Khairil said.
“The fintech and digital players are the ones going out there and helping the SMEs … From a reach perspective, and a credit processing perspective, they certainly have a lot more capabilities to reach the SMEs in this particular point in time.”
Leveraging technology to serve MSMEs
Increased competition and accelerated digitalization have forced banks to change their attitude towards SMEs and many are finally waking up to the opportunity, said Swapnil Deshmukh, director of business development at Tagit, a Singapore-based digital banking engagement solutions provider.
“Until a few years ago, when it came to offering digital solutions to SMEs, banks looked at it as a ‘retail plus’ solution, or a ‘corporate light’ digital solution. But that’s not the case anymore,” Swapnil said. “So we’ve seen the conversation changing from ‘Should we focus on SMEs, have a dedicated solution for SMEs?’ to ‘How do you offer the best digital experience and capture that market?’.”
Technology and digital platforms have a key role to play in addressing the market’s underserved segments, said Jeffrey Ng Eow Oo, managing director of RHB’s group community banking division, stressing the need to partner up with ecosystem providers to access alternative data. These can be used to assess a borrower’s risk profile where traditional credit data is lacking.
“If you have enough information, you can do a very good assessment and support some of these businesses,” said Jeffrey.
“The challenge here for banks is … not a lot of institutions have access to those information … In this day and age, collaboration makes a lot of sense especially with partners that are already fully embedded into such an ecosystem.
“As banks start to progress into API banking and get connected with different partners, you have access to a lot more information, and with that you will get to serve a particular segment a lot better than before.”
At a time of COVID-19 disruption, there’s a need to rethink how credit risk is assessed, said KJ Balan, head of SME Banking for commercial banking Malaysia at CIMB. While in the past, bank statements were a good proxy, they are no longer relevant since businesses are not operating like they would in normal circumstances.
Need for hyper-personalisation
Traditional lenders must also consider that the nature of SME businesses is changing, Swapnil said, noting how diverse and disparate this segment is today with, for example, the rise of the gig economy.
The SME category is made up enterprises employing fewer than 250 employees, and include small enterprises with 50 workers or less, as well as micro-enterprises which employs less than nine people. This makes the SME segment very heterogenous with different segments that have different lifecycles and banking needs.
For example, the micro-enterprise segment typically comprises very small organizations with very streamlined businesses, and three to five employees at most. These typically don’t borrow money at all, and if they do, would rather turn to family and friends, or loan sharks, Khairil said.
These are the companies that are at a greater risk in the pandemic because they don’t have a treasury to weather the storm and face difficulty raising working capital from traditional lenders.
Companies like Axiata Digital on focusing on this segment, addressing the funding gap with a streamlined, digitised loan application and approval process.
Noting the need for more personalised SME banking offerings, Ng said that the sector is now moving towards a more “segment-based and differentiated approach” where different players are serving different lifecycles and markets.
“Banks may not be able to touch all of [the SMEs] and the market is big enough for the peer-to-peer (P2P) lenders and fintechs because the need is huge,” Balan said.
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