As the economies of the CEE region are booming, the number of SME clients is growing significantly. As they become more involved in the global economy, these clients require more sophisticated services. This puts banks under pressure to meet the growing expectations of their SME customers. To compete in such an industry they must offer the best possible services.

Until not so long age SMEs received relatively little attention from policy-makers in the region. The focus of governments was on consolidating macroeconomic stabilisation and on managing the restructuring and privatisation of large companies. Only limited supported was available for small enterprises.

However, SMEs are playing a key role in Europe´s Economy. They make a major ontribution to job creation and economic development and are behind the expansion of the services, construction and transport sectors that are driving economic growth in the region. Clusters of small enterprises moving into higher value added operations are emerging, spreading innovation throughout many parts of Central and Eastern Europe.

Despite the fact that the SME sector is extremely heterogeneous, it accounts for 99.8% of all companies, 2/3 of private sector employment and almost 60 % of turnover.

Gerhard Huemer, Director for Economic and Fiscal Policy at the European Employers Association for SMEs (UEAPME), which represents 11 million SMEs with 50 million collective employees and 72 business organizations from 30 European Countries, underlines the importance of SMEs in a functioning market economy: “Economic areas with a strong SME sector tend to have a higher degree of economic stability regarding growth and employment and to be less affected by economic crises. On average they show a higher level of qualification and are better socially integrated. The development of dynamic SMEs also creates communities with a strong interest in social stability and a healthy market economy.”

SMEs also have a crucial role in the transition process in Central and Southeastern Europe. They make up the vast majority of private businesses operating in these countries and, because of their size and adaptability, they are likely to be the largest source of employment generation in the next few years. As in more mature market economies, a vibrant SME sector will eventually become not only a source of employment, but will also be a key source of innovation, entrepreneurship, and productivity growth.

Main economic challenges for SMEs in Europe:

SMEs have to adapt to the internal market and more liberal market rules within the EU. Not only do they have cope with growing international competition, globalization and technological changes but they are also increasingly facing competition from the informal sector.

The main aspects of restructuring the SME sector include increasing the capacity for innovation, gain additional qualification, access to technology, and building networks. This is not only true for the creation of new companies and business start-ups but also for the expansion and internationalization of companies. “SMEs can only cope with these challenges if they have sufficient access to finance,” UEAPME’s Huemer points out.

Banks and their SME clients:

Why are there misunderstandings? This is especially true for SMEs, since the microbusiness segment is historically the hardest commercial sector to find reliable and usable data upon which to base sound lending decisions. However, potentially, it represents one of the most profitable lending segments in any emerging credit market. Unfortunately it is often difficult for banks to understand how SMEs work because of information asymmetries on both sides and a lack of transparency.

In order to find the best solutions for micro business, banks have to understand the characteristics of micro business. Domagoj Karadjole, head of Small Entrepreneurship department, Erste Bank Croatia, explains: “Frequently SMEs are one-man operations and often involve informal activities, cash flows and financial information. The line between business and personal finances is often blurred. SME clients therefore need both corporate and private banking products. The focus has to be on simple procedures, fast and personalized service as well as on advisory service. Many of our SME clients seen us as a ‘business partner’ – they appreciate specialized attention, since for many of them it is the first experience with a bank. They simply feel important.”

Mikhail Chapovalov, Deputy Chief Manager for SME Crediting at Russias MDM Bank, takes a similar stance. “Simplicity and Transparency are key success factors in this business. Processes need to be designed very simple, efficient and effective,” he says.

Thus, a key success factor in SME banking is not only a high quality program embracing all the components of the marketing mix, from researching the sector through to sales and delivery – but also an organisation-wide commitment to the venture – to underpin the required multi-disciplinary approach.

Recent developments in SME risk management

Many SMEs are irritated by the new rating systems, but banks see effective risk management strategies as a crucial tool in succedding in the SME business. They make use of the latest automated and score based techniques to support both application processing and account management. “In the long term, the measure and control of Operational and Credit risks are the new frontier of efficiency in SME retail banking,” argues Francesco Pusateri, who is responsible for Internal Control Systems at UniCredit Group.

Ian Read, Director at Fair Isaac, highlights recent developments in SME risk management: “A convergence of economic, monetary, political and regulatory factors is driving SME lenders globally to adopt predictive models and decision automation technology. SME portfolios contain opportunities for increased risk management sophistication, leveraging consumer and commercial data, scores and technology to stabilize risk and reduce operating costs. Some US experience can be used to guide application of credit scoring for SME exposures. It is our belief that US experience contains many lessons for EU lenders.

While consumer bureau data is a powerful predictor, its use is frequently prohibited in SME lending decisions. Despite this, highly predictive SME credit scoring models can still be successfully developed. Best practice risk management benefits must and do stand on their own merits, and bring with them the additional rewards of better compliance.” The EC’s SME Finance Facility

The costs imposed on SMEs by a hostile business environment are generally more severe than those suffered by larger firms. Thus, SMEs can also expect to greatly benefit from the establishment of an efficient and nondiscriminatory investment framework. Strong commitment by the Governments of the region, on the one hand, and technical support and assistance from the international community, on the other, is instrumental. The European Commission is therefore fostering SME lending through its SME Finance Facility.

“The SME Finance Facility is a programme developed by the European Commission in cooperation with the EIB and other IFIs to support a development of the SME lending market in eligible countries. So far the facility was focusing mostly on the New Member States, however, the focus will be changing, moving away from New Member States towards accession and candidate countries,” explains Māris Briedis, head of the EIB’s Lending Operations in Poland.

Financing is channelled through those intermediaries (banks, leasing companies and investment funds) in the candidate countries that can demonstrate a satisfactory level of financial viability, capable management skills and a commitment to SMEs in their lending/investment policies.