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Home > Capital Markets Best Practice > Banks and Small and Medium-Sized Enterprises: Recent Business Developments

Capital Markets Best Practice

Banks and Small and Medium-Sized Enterprises: Recent Business Developments

by Sergio Schmukler, Augusto de la Torre, and María Soledad Martínez Pería

Table of contents

Executive Summary

  • Banks consider SMEs to be core strategic businesses with a high profit potential.

  • To serve SMEs, banks are now establishing separate dedicated units, standardized processes, and risk-management systems.

  • The relationship manager’s role is crucial for attracting new customers, and selling products to existing SME customers.

  • Banks are increasingly serving SMEs through different transactional technologies. which emphasize cross-selling.

  • Large, multiple-service banks are the main players in the SME market.


A common perception is that small and medium-sized enterprises (SMEs) cannot access appropriate financing. This perception is often supported by academic and policy circles’ “conventional wisdom” that banks are generally not interested in dealing with SMEs, mainly due to SMEs’ perceived opaqueness1 and higher informality.2 As capital markets do not compensate for these deficiencies in the banking sector, the need to receive special assistance, such as government programs to increase lending, has been suggested.3 In recent years, SME financing initiatives included government-subsidized lines of credit and public guarantee funds.4

In the academic literature, there is evidence that banks (especially small and niche players) engage with SMEs through relationship lending. Relationship lending can overcome opaqueness due to the primary reliance on “soft” information gathered by the loan officer through continuous, personalized, direct contacts with SMEs.5 However, in a series of studies recently conducted by the World Bank, new stylized facts point to a gap between the conventional view and the way banks are actually interacting with SMEs.6

First, new evidence suggests that most banks, including large and foreign banks, indeed serve SMEs, finding this segment very profitable.7 Second, different transactional technologies that facilitate arms-length lending (such as credit scoring and significantly standardized risk-rating tools and processes, as well as special products such as asset-based lending, factoring, fixed-asset lending, and leasing) are increasingly applied to SME financing (Berger and Udell, 2006). Third, banks try to serve SMEs in a holistic way through a wide range of products and services, with fee-based products rising in importance, placing cross-selling at the heart of their business strategy.

Under this new model of bank engagement with SMEs, larger, multiple-service banks exhibit, through the use of new technologies, business models, and risk-management systems, a comparative advantage in offering a wide range of products and services on a large scale, becoming leaders in this business segment.

New Business Model

Banks’ high level of interest towards SMEs has, consequently, brought major changes to business models. First, as SMEs have become a strategic sector, banks are changing their organizational set-up to approach and serve this segment efficiently. Two main structures can be broadly categorized. The first combines the work of a commercial and credit risk team established at headquarters, with relationship managers distributed throughout the branches. The second consists of business centers or regional centers that operate as mediators between headquarters and branches, with a team leader or regional manager who controls and trains the relationship managers of the corresponding branches. In addition, banks are establishing separate, dedicated units with new strategies to cater adequately for the specific needs of SMEs. These dedicated business units approach SMEs in an integrated way, offering them a wide variety of products and services, including both deposits and loan products. In this set-up, relationship managers (RMs) are instrumental in attracting new customers, and selling products to existing ones. RMs look for new clients and prepare the information of each SME that is presented at the regional centers or at headquarters. They develop a relationship with the client, and, in some cases, RMs are allowed to express their opinion, make recommendations, or even present the case to the credit committee.

Second, the new model serves SMEs at all branches, and with standardized processes, facilitating the reduction of the high transaction costs that dealing with each SME entails. In most cases, branches and headquarters complement each other and undertake different functions. The initial stages of granting loans to SMEs are decentralized in most banks, while later stages, such as risk analysis or loan recovery, are usually centralized. In addition, banks exploit the synergies of working with different types of clients. Using information from existing firm databases, such as credit bureaus, relying on existing deposit clients, and attracting clients with bank credit are also common approaches that banks use to identify prospective SMEs.

Third, regarding credit-risk management, banks are reorganizing their systems, with a greater degree of sophistication among international banks and the leading, large domestic banks. Typically, risk management is a process that is organizationally separated from sales, and primarily done independently at headquarters. In most large banks, credit-risk management is not automated. Furthermore, in most cases, credit-risk management involves a credit-risk analyst, who is in charge of conducting both qualitative and quantitative risk assessments on the SME. The quality rating of SME management and SWOT (strengths, weaknesses, opportunities, and threats) analysis are the main components of qualitative assessments, while the financial analysis and projections of the SME firm and the SME owner are the main quantitative assessments. Qualitative assessments usually include an analysis of the SMEs’ products, their demand and market structure, the quality of the owners and managers (including the degree of separation between management and owners), the degree of informality, the years of activity in the sector, and the vulnerability to foreign-exchange-rate fluctuations. Quantitative assessments entail an analysis of profitability, cash-flow generation capacity, solvency, quality of assets, structure of balance sheets, and global guarantees. Moreover, scoring models are still being developed, and primarily applied to small loans.

Monitoring of the credit-risk outlook is standardized at the majority of banks. Some monitoring mechanisms used frequently are preventive triggers and alerts automatically generated to signal the deterioration of the SMEs’ payment capacity. However, credit-risk monitoring still depends on the diligence of the relationship manager or the credit-risk analyst. Some banks use a system that allows different individuals to provide input on each enterprise (such as auditors, back-office staff, sales personnel, and risk analysts).

The business and risk-management models described above can be better pursued by large universal banks, especially foreign ones, which can be more aggressive in reaching out to SME clients, and are better suited to conduct lending based on automated scoring models for small loans (as they have the know-how and models to do so) and template-type rating systems for larger loans (based on streamlined, standardized versions of corporate rating).

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Further reading


  • Berger, Allen N., and Gregory F. Udell. “Universal banking and the future of small business lending.” In Anthony Saunders and Ingo Walter (eds). Financial System Design: The Case for Universal Banking. Burr Ridge, IL: Irwin, 1996; 559–627.
  • de la Torre, Augusto, Maria Soledad Martínez Pería, Mercedes Politi, Sergio Schmukler, and Victoria Vanasco. “How do banks serve SMEs? Business and risk management models.” In Benoît Leleux, Ximena Escobar de Nogales, and Albert Diversé (eds). Small and Medium Enterprise Finance in Emerging and Frontier Markets. IMD and IFC, 2008a.
  • DeYoung, Robert, and William C. Hunter. “Deregulation, the internet, and the competitive viability of large and community banks.” In Benton E. Gup (ed). The Future of Banking. Westport, CT: Quorom Books, 2003; 173–202.
  • Organisation for Economic Co-operation and Development (OECD). The SME Financing Gap: Volume I—Theory and Evidence. Paris: OECD Publishing, 2006.


  • Berger, Allen N., and Gregory F. Udell. “A more complete conceptual framework for SME finance.” Journal of Banking and Finance 30:11 (November 2006): 2945–2966. Online at:
  • Carey, Mark, Stephen Prowse, John Rea, and Gregory Udell. “The economics of the private placements: A new look.” Financial Markets, Institutions and Instruments 2:3 (August 1993): 1–66.
  • Carter, David A., James E. McNulty, and James A. Verbrugge. “Do small banks have an advantage in lending? An examination of risk-adjusted yields on business loans at large and small banks.” Journal of Financial Services Research 25:2–3 (April 2004): 233–252. Online at:
  • DeYoung, Robert. “Mergers and the changing landscape of commercial banking (part II).” Chicago Fed Letter 150 (February 2000). Online at:
  • DeYoung, Robert, William C. Hunter, and Gregory F. Udell. “The past, present, and probable future for community banks.” Journal of Financial Services Research 25:2–3 (April 2004): 85–133. Online at:


  • Beck, Thorsten, Asli Demirgüç-Kunt, and María Soledad Martínez Pería. “Bank financing for SMEs around the world. Drivers, obstacles, business models, and lending practices.” Policy Research Working Paper 4785. World Bank, November 2008. Online at:
  • de la Torre, Augusto, Juan Carlos Gozzi, and Sergio L. Schmukler. “Innovative experiences in access to finance: Market friendly roles for the visible hand?” Policy Research Working Paper 4326. World Bank, November 2007. Online at:
  • de la Torre, Augusto, María Soledad Martínez Pería, and Sergio L. Schmukler. “Bank involvement with SMEs: Beyond relationship lending.” Policy Research Working Paper 4649. World Bank, June 2008b. Online at:
  • Independent Evaluation Group (IEG). “Financing micro, small, and medium enterprises through financial intermediaries.” Washinton, DC: International Finance Corporation, World Bank, 2008.
  • Stephanou, Constantinos, and Camila Rodriguez. “Bank financing to small and medium-sized enterprises (SMEs) in Colombia.” Policy Research Working Paper 4481. World Bank, January 2008. Online at:
  • World Bank. “Bank financing to small and medium enterprises: Survey results from Argentina and Chile.” 2007a. Online at:
  • World Bank. “Bank lending to small and medium enterprises: The Republic of Serbia.” 2007b. Online at:
  • World Economic Forum (WEF). “World Economic Forum on Latin America: Securing a place in an uncertain economic landscape—Cancún, Mexico 15–16 April 2008—Report.” Online at:

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