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October 26, 2010

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Resilient small, medium firms need more loans

ACROSS Asia, small and medium enterprises are bouncing back fast from the global financial crisis.

Not only does this reflect the remarkable resilience and adaptability of SMEs. It is great news for Asians who rely, now more than ever, on these dynamic businesses for their prosperity.

Asian SMEs, particularly those involved in exports, were hit hard by the global financial crisis. However, a Standard Chartered research report now points to a sound recovery in the sector, propelled by Asia's strong recovery in the past year and the turn in the US inventory cycle, which has allowed exports to pick up.

As the dust settles, it would seem that conditions for SMEs were less tough in this recession than during the 1997-98 financial crisis. There are a number of different reasons for this. Chiefly, Asian banks were less affected in this downturn and maintained lending, while governments across Asia, drawing on lessons from the Asian financial crisis a decade earlier, worked proactively to sustain the flow of credit to SMEs - particularly through government guarantee schemes.

In the past 10-15 years, there has been a seismic shift in the understanding of SMEs as drivers of growth and employment. It is hardly possible to overstate their importance to Asian economies.

Firms with fewer than 250 employees make up the vast bulk of businesses. They typically account for around 50 per cent of formal employment and contribute 30-60 per cent or more of GDP.

In China, the contribution of SMEs to the economy is immense, with SMEs including self-employed individuals accounting for 99.8 per cent of businesses, 75 per cent of urban employment and 60 per cent of GDP.

Export engine

SMEs also power international trade, with SMEs in China, for example, accounting for as much as 68 per cent of export volume.

In fact, throughout Asia the significance of SMEs to cross border trade is often much greater than perceived, because many of them function as essential suppliers to larger exporting firms.

Often, small firms create significant clusters, supplying one or a few large companies, all part of the global production chain.

Meanwhile, new technologies - the Internet and changing manufacturing processes - are shifting the economics of scale.

The division between small and large enterprises is changing, with SMEs becoming increasingly crucial to maintaining economic momentum across Asia.

SMEs are vital, not just to support the present recovery, but also to help generate the huge numbers of new jobs required to meet the demographic needs of Asia's young populations.

Dynamic and resourceful, many SMEs introduce new products or processes to the market. They are also social safety nets, cushioning the poor and the vulnerable from economic adversity.

And, with increasing numbers of female entrepreneurs, they play an important role in helping women to become active participants in the economy.

This is important, because there is compelling evidence that, when women work, they have a big impact on both overall economic growth and the reduction of poverty.

For banks, SMEs represent a great opportunity as new technologies make it easier to deploy state-of-the-art business models with customized statistical credit scoring for smaller firms. The traditional view of SMEs as being unprofitable to banks is hopelessly outdated. With the right business model, dedicated teams and tailored, cost-effective products, it is possible to bank SMEs profitably.

Under-banked

Yet, access to finance remains a primary concern for SMEs with many being severely under-banked.

SMEs need banking because they lack the cash flow to make large investments and are unable to access capital markets like large firms.

Today, their needs go far beyond local finance. As SMEs seek to grow beyond borders, they require not just loans, but a full and sophisticated range of banking services, including credit, trade and working capital, cash management, treasury and insurance.

During the recent financial crisis, Standard Chartered Bank stayed open for business, increasing our global lending to the SME sector by 14 cent to more than US$13 billion in 2009. Across our footprint in Asia, Africa and the Middle East, we serve 650,000 SME customers, helping them to grow locally and expand into regional markets and beyond. SMEs are now one of the fastest growing segments of consumer banking at Standard Chartered Bank.

As Asia's growth accelerates - based on the region's strong fundamentals, proactive policies and increasing confidence - there continues to be a huge potential for SMEs.

In fact, across our international footprint, we see the sector growing by 8-10 per cent per annum. And, across Asia, thriving SMEs mean employment, prosperity and economic growth, benefiting communities for years to come.

(The author is Global Head, SME Banking, at Standard Chartered Bank.)




 

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