\'Missing\' micro businesses in SME financing by banks

Over the past several years, SMEs have been the most focused and prioritised segment for credit growth. Policymakers have identified the SMEs as the prime driver of economic emancipation for a developing country like Bangladesh, where industrialisation is yet to gather significant foothold and agri-output is still considered the main indicator of economic stability. As Bangladesh Bank kept on providing policy support and incentives for the financial institutions for penetrating in the SME arena, more and more banks ventured into the segment shrugging off the "risky investment" stereotype that traditional bankers preached before. 
Banks' initial approach to the sector was to focus on the larger enterprises of the SME sphere - the medium segment, as banks were more comfortable with wholesale banking and reluctant to invest heavily for the retail setup needed for the smaller segments. In the new millennium, a few of the 3rd generation banks radically tilted that shape and showed the market of the enduring benefit in following retail approach for catering small enterprises. With large number of players and intense competition, many banks and financial institutions followed suit, and suddenly, lending product offering to small businesses became a regular practice. 
 However, only recently, Bangladesh Bank started to shift its focus to the bottom of SME space with MSME concept -the first "M" standing for Micro enterprises. In its recent directive for the definition of SMEs, BB clearly defined micro businesses over cottage industries recognising its size, employment generation prospect and possible impact on the overall economy. 
Now what is this Micro business segment? In simple term, it is the very small businesses, mostly trading and service enterprises whose investment is in the range of BDT 3 hundred thousand to BDT half a million, with lion portion of such businesses in sole proprietorship form. These enterprises can be your neighbouring typical grocery stores, tailoring shops and street-side restaurants. Zero availability of collateral is the typical trait for these businesses which hinders its chances to enter the formal financial sector for meeting fund requirement.  
Due to the limited investment, minimum footprint, low net worth and no collateral, these businesses are inherently risky in comparison to other larger businesses in the eyes of traditional bankers. Also, one has to underwrite a large pool of customers to build a financially viable asset portfolio in this segment as the individual loan size is very small. To counter these, a bank has to build costly infrastructure and employ large pool of skilled resources in search of scalability, which is the only way to ensure profitability and sustainable growth that may justify investing in micro businesses. 
Financing micro business should not be confused with microfinance. As per Investopedia, "Microfinance is a type of banking service that is provided to unemployed or low-income individuals, or groups who otherwise have no other access to financial services." However, while financing micro business, a bank finances very small enterprises that are registered as per the law of the land as business entities.  
Regarding the "highly risky" term often used to characterise this segment, it is surprising to notice that the lower you go to the bottom of the pyramid of business size, the more resilience you witness. Regular restructuring, rescheduling and default culture visible in wholesale banking even with deep pocket clientele is not a trait of small or micro businesses. Here, the entrepreneurs are highly motivated, directly involved and fully invested as if their lives depend on the success of their businesses. Exponential growth and flexibility of operation led these businesses to withstand seasonal or cyclical downturns and take full advantages of bullish market in a developing and growing economy.  
The resilience of micro businesses is partially reflected in the success story of Bangladesh's micro finance institutions (MFIs). MFIs provides meager loans to poor local households and rural women with entrepreneurial spirit, a segment of the society that was also dubbed as extremely risky as borrowers and vulnerable. A portion of very small businesses are also in the purview of the target segment of MFIs as they often chart into the 'large ticket' territory in search of additional revenue stream. Bangladesh's MFIs have a recovery track record of almost 98 per cent which is markedly better compared to that of traditional bank finance that are involved in so-called safe investment in large, heavily collateralised banking. 
In the latest Economic Census by the Bangladesh Bureau of Statistics (BBS), it was revealed that there are some 4.5 million business entities registered across the country that are legally involved with any sort of economic activity. Of these, more than 99 per cent are MSMEs, among which a whopping 81 per cent belongs to the micro business segment in terms of investment and manpower involved. With the economy of the country growing consistently at more than 6 per cent over the past decade or so, the micro segment of businesses are primed to lead the growth accelerator. 
These growth prospects and the size of micro business segment raise the question whether only MFIs are the right players to cater the growing need of funds in this space. In a over-crowded banking industry with cut-throat competition and ever declining margin, what is really holding back other financiers to move into this segment? One, of course is the perception that micro businesses are quite risky. Two, heavy investment requirement at initial stage with wide distribution network. That means, it will be even harder to exit from the segment. And three, high cost structure to run operation in this spectrum of business. Especially, as the portfolio grows, so does the number of customers (so it resembles retail banking model), but the underwriting and service to these customers continue to be as complex and expensive as wholesale banking. 
Truly, if someone tries to approach the micro business market with the way BRAC Bank or Islami Bank approached in early 2000s, there's no escaping the aforesaid three hurdles. But post-2017, this same approach may not be worthwhile. In many developing markets, we can find success stories of financiers followed innovative and technology-driven business models to penetrate micro business segment and achieve tremendous growth. In all such stories, two terms are commonplace - technology and scalability. Only through cutting edge innovations, these banks have achieved sustainable business success and profitability that took traditional financiers years to attain. 
From loan origination to underwriting to disbursement and servicing, all can be streamlined, scaled up and economised with innovative technological solutions. Many of such components can be purchased and used right-out-of-the-shelf from industry-defining fintechs or can be developed or customised to the need and uniqueness of the bank, its customers and locality. Even the loan monitoring and recovery operations can be made more effective  through the use and optimisation of unconventional communication channels and tech-savvy solutions. 
Optical Character Reader (OCR) and Image Character Reader (ICR) have replaced the requirement of a human intermediary for inputting the most essential customer information to bank's database. Customised credit scoring cards with self learning rule engines have reduced human interactions needed to appraise and underwrite loan facilities for homogeneous customers. Mobile banking and electronic fund transfer have made fund availability for the borrowers in the blink of an eye. Sales force automation solutions allow banks to optimise the productivity of its relationship managers by knocking at the right doors. Customer Relationship Management (CRM) software has made it possible to capture all the interaction with a particular client and promptly offers the right loan products to the right enterprises just at the right time. 
The micro business segment can be a new driver for generating new value chain for banks and a space that can still provide scope for  exponential growth in the already crowded MSME market.

The writer is a banker.
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