Carving a niche in SME banking

BANKS have zeroed in on SMEs over the past few years even as margins in their other core business segments become thin.

But while other financial institutions have rolled out robust promotional campaigns early on to grow their small business portfolio, Hong Leong Bank has, admittedly, been a little late in the race for a share of the SME pie, says its SME banking head Terrence Teoh.

However, Teoh says there is still a niche that the bank can carve for itself within the SME segment.

He believes that the bank’s recent initiatives to change the way it approaches small businesses and better understand their operations will enable its SME portfolio to enjoy steady growth in the coming years.

“We can’t change the past, but what we can change is the future. Even though all the banks are going after SMEs now, there are still a lot of start-ups with operations of less than three years that most banks don’t lend to.

“Since we want to serve SMEs, we decided that we will also serve the start-ups, which we did not do previously because we didn’t know how to. So we learned how to do it.

“We’ve seen peer-to-peer (P2P) lenders coming into the market to meet this need. But the gap is still huge and it’s a blue ocean if we do it right, ” he says.

It is estimated that there is a financing gap of some RM60bil in the SME sector.

In the past, banks have notably shied away from small businesses as the cost of acquiring customers was high given that the value per loan is usually lower than loans given out to large corporations.

But the advancement of technology has brought down the cost of customer acquisition significantly and Hong Leong intends to leverage digitalisation to further grow this segment.

In August 2017, Hong Leong repositioned its SME banking, tweaked its processes and simplified its documentation needs to accommodate smaller businesses.

“We started late. But we have since fixed some structural issues and put customers at the central part of the journey to obtain financing. Whatever we do, product development, coming up with standard operating procedures, it should be built around the customer.

“To be the bank of choice for these companies, we must help them be successful. When SMEs grow, Hong Leong Bank will be able to grow with them. So we’ve made things simple and easy for them when they deal with us, ” Teoh explains.

The bank’s efforts have borne fruits. Last year, its SME banking registered 40% year-on-year growth. Non-performing loans (NPL) were low at 0.81% versus the industry benchmark of about 2%-3%.

Teoh is confident of recording 30% growth this year.

“We are crossing RM500mil for this portfolio. And we continue to meet with association chairman and committees to find out how the industry is doing and how they will be impacted by Covid-19, the trade war and things like that. Then we design additional enhancement to our products to meet their needs.

“Previously, we didn’t do our groundwork. We just came up with products that we thought the market would want. But now, our product development is based on industry feedback.”

Among its focus pillars within the SME sector include the motor industry as well as the halal, solar, travel and logistics sectors.

Teoh says among its innovative products is the up to RM5mil clean loan for SMEs in the motorcycle industry at BLR + 0%. He says the team had spent time getting to know the industry before tailoring the products. The bank is now crossing the half a billion mark in financing for the motorcycle industry portfolio at 0% NPL.

He adds that the bank is also taking a proactive step in future product development. While new companies may not have the required profit and loss and balance sheet statements, he notes that most of them have business accounts with the bank.

“So actually we have all the data and know-your-customer processes can be done. We are using a lot of data to assess these companies and are able to identify and hopefully be able to reach out to these potential financing customers.

“And based on their transactions, we will know their trend, whether they may need additional funds or not. We hope to provide them with a pre-approve line before they even ask for it and allow them the flexibility in the repayment installments.

“We are building the capacity for that. I think clients will appreciate that kind of personalised customer experience, ” Teoh shares.

He also emphasises the bank’s belief in fair banking.

“We don’t want to overcharge the customer. If we are able to bring down the cost of acquiring a customer and manage the NPL well, the bank will make a reasonable and acceptable return.

That’s all we need. If we are able to make 2%-3% on this portfolio, we are happy.

“We want to develop a healthy portfolio, ” he says.

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