MORE lenders on Chinese mainland are joining the global trend toward making small business loans, both to stimulate lending growth and to show their "social commitment."

Tim Hinton, global head of SME Banking at Standard Chartered Bank, says his team is focused on relationship continuity.

Hinton has been with Standard Chartered for 26 years, spending a good deal of his time in wholesale banking, where he serviced middle market companies with annual revenues above US$37.5 million.

Prior to his present position, he was the head of private banking in the United Kingdom, responsible for looking after high net worth individuals.

Besides the UK, Hinton has worked in other key markets of the bank, including Hong Kong, South Korea, India and the United Arab Emirates. He is currently based in Singapore.

He is the lender's representative for the UK government-sponsored Business Growth Fund, an equity fund formed by the top five British banks and aimed at assisting fast growth companies.

Sitting in the bank's China head office in Shanghai's Lujiazui area, Hinton talked with Shanghai Daily about the lender's "GAM-FAM" model of handling SME customers. He also shared his thoughts on how banks and small businesses can help each other to ride on the rising economy of the Chinese mainland.

Q: What are the major characteristics of SME banking?

A: First, it has a very wide range of customers. We've got some very small companies, like sole proprietorships, and up to some quite large companies. So the role of SME banking helps these businesses through that growth cycle. They are very small at the beginning of the relationship. Because a new venture has no track record, we have to rely on the entrepreneur, on support from a guarantor or on some fixed asset pledged to the business.

I think the way it starts is very different from the way it evolves. Once the business has a track record, we can start taking some risks based on future cash flows, past evidence of success and competitive advantage in what they are doing and then improve our contracts with customers.

As we take them through the life cycle and they reach a certain size, we will tend to hand them over to our wholesale banking.

We are the ones that nurture and incubate SMEs through the early years. For that, we have to know two things: when is the time for them to go into the new world of cash flow lending, and how to get them ready for wholesale banking-style relationships.

Q: How do you determine if an SME customer is worth lending to?

A: Typically, when we start with SME customers, we don't just lend to them. We have them bank with us so we can help manage their cash, payments, trade financing and money exchange risk.

After two or three years, they accrue financial statements that show us their performance. We review the success and viability of their business. At Standard Chartered, we don't normally lend a lot of amount in the early years. We lend enough to get them started.

But this is not just about lending. We are trying to help educate them, to show them why they need to produce clear financial statements, how to present themselves to a bank and how to become financially astute. We provide literature to help explain their financial needs based on their business models.

Q: Higher risk usually means higher profits for a bank. How do you make small loans profitable?

A: Banks have always made personal loans through credit cards or direct lending. Ten years ago, Standard Chartered took the concept of a personal loan and applied it to small businesses because many of these people might have been borrowers in personal accounts.

Now that they are running a business, they might need a little bit more money behind them. So we launched business installment loan, which is our entry product for small businesses. If the firm can show us a track record for at least three years, we will lend them a lump sum over a maximum of two to three years.

If they can show us their bank statements to prove that they've got good cash flow or regular receipts coming in to their business, we will let them repay the loan in 24 or 36 equal installments.

So we start small, but we do lend a larger amount sum than they could get in personal name accounts.

Assuming that they pay these installments on time for the first 12 months, we are happy to do a top up. Once we see their behavior, discipline and ability to repay, we top up a little bit more from the entry loan.

The business does have a relatively high default rate and low ticket loan size. It's a business of lots of customers with very small loans. But we managed to grow the income from SME banking by 5 percent last year at the group level. That's about 20 percent of our consumer banking business in terms of profit, and it's a major contributor to the funding of the bank - about 10 percent of the bank's deposit base. The figure is even bigger in China.

Q: Is SME banking different from firm to firm?

A: The SME realm is quite a diverse one in terms of size and stages of customers. We have to service different types of companies in slightly different ways. We have a coverage model - what we call the way we cover our customers - which is the same everywhere in the world.

For larger customers, we give them a relationship manager and very attentive coverage. We have a second-tier, which offers slightly less attention but provides portfolio managers if a business needs someone to talk to. We have some customers who just have a very basic relationship with us and maybe go to a branch only a few times a year. We give them an electronic Internet service connection that is much easier to manage.

If the company has an office in their home country and a factory, procurement office or sales office in China, then it's typically a larger customer in our portfolio and will provide a relationship manager in their home market.

If the client needs a bank account in China, they would contact one of our relationship managers here. Then we would link the managers up. The manager in the customer's home market stays in control. They are what we call global account managers. In China, we call them field account managers. For short, we call it the GAM-FAM model. We can handle needs in many locations by having one "GAM" in charge of the relationship and as many "FAMs" as we need. Although most SMEs operate in one single country, some of them require overseas banking because they have suppliers and customers offshore.

Q: Is SME banking in China different from other countries?

A: Businessmen usually start by doing everything themselves. They have the idea, they are the customer link, they do their own procurement, they are the ones who hire and manage finances. So at the early stage, an entrepreneur tends to do everything.

As they get bigger, they hire more professionals to help them. A bank can be more than just the bank in the early years. We can help educate them and suggest how to do things better and become more efficient. China is no different from anywhere else in that regard.

SMEs don't plan ahead as well as bigger companies do. China is growing so quickly and there is so much business to be done. I think it's a bit accentuated here, so we need to give advice in a very timely manner.

When it comes to credit assessment, some countries have credit bureaus where we can check on a client's credit history. Have they gone bankrupt? Do they pay bills on time? In China, that system is not as advanced as in many countries, so we ask to see their bank statements and use references from other people.

The other difference in China is that the private sector here is relatively new. Therefore, there are fewer track records and fewer bankers to service these companies. So the war for talent is acute. The customers themselves are not different here, but development is at a different stage.