There are five key blocks which are critical in delivering value in the consumer and MSME banking space. I have placed these blocks purposely in a pyramid to signify the order of intervention, i.e. interventions along Structure and People take precedence over those along Technology. This pyramid is the pictorial depiction of the proprietary diagnostic tool ‘MSME Assess’, but can be used with minor tweaks for consumer banking too.
Diagnostic tool – Any bank embarking on a major project in the MSME space would do well to employ a diagnostic tool at the outset. The diagnostic tool will analyze and help lay out the strengths and weaknesses in the current system across all these blocks. A good diagnostic tool will go further and do some sort of a benchmark of the bank’s capabilities against hypothetical or existing leading practices. A great diagnostic tool though would be interactive and provide a list of possible interventions for each level of capability across these banking blocks. The bank can then decide the order of implementation and be in a position to appreciate that getting desired outcomes within one block will more often than not demand interventions across other blocks too. According to me this is the biggest benefit of an advanced diagnostic tool. It can help in laying out starkly the linkages between the various components of the banking blocks. MSME Assess maps out the maturity level of each of the criteria measured within the blocks. These maturity levels are denoted as – emerging, developing, developed and advanced. Trained practitioners can use the tool to map each of the 32 criteria of the banking blocks to their maturity levels. Banks then take a call on the implementation priority based on the maturity levels and resource commitment based on the possible required interventions as shown by the tool.
MSME Assess – A brief elaboration of these blocks and the components they measure is in order here to give you a flavor of what is on offer:
Structure and People– A bank can have the best technology, best products and infrastructure but without the appropriate organization structure and the right quality of people, the bank will always struggle. This is the reason that this block sits on top of our SME Assess pyramid. Leading banks in the MSME space all have the ability to measure the profitability of the MSME business. The majority of these banks have MSME as a separate division within the bank, thus providing the necessary resources and appreciating that the MSME culture is distinct from their retail and large corporate counterparts. This block describes the required core competencies as:
- Organization and reporting structure,
- HR practices including performance management and people development practices.
- These core competencies are further decomposed to the next measureable level of criteria, for eg-
- Performance measurement
- Career path development
The tool further describes for each of these criteria their state when found across the four maturity levels as mentioned earlier.
Credit and Risk – This block describes the capabilities of the bank in across its risk measurement and monitoring systems and its ability to provide credit underwriting capabilities in line with the requirements for the MSME segment. The aim of the MSME credit function is to provide consistent cost effective credit underwriting without over reliance on collateral. Banks which are able to employ lending technologies which can thrive without full coverage of collateral are poised to do well in a scenario where the MSME market is still largely untapped. The ability of banks to identify risks and monitor and resolve them well in advance is of paramount importance in this portfolio, where the slide into NPAs can be fast and the furious.
The core competencies benchmarked in this block are:
- Credit Structure
- Credit Underwriting
- Risk Monitoring
- Delinquency Management
For example within Risk Monitoring the criteria are:
- Risk modeling
- Early warning systems
- Risk segmentation
- Risk processes
Market Segments and Products – Identifying and defining the market segments that a bank wishes to compete in is very critical. Building expertise and knowledge of particular segments and sectors has been proven time and again to be a successful way of building a profitable MSME book. Over time, the superior knowledge leads to the raising of welcome entry barriers for others wishing for a share of that market. Shriram Transport, is one name that easily comes to mind in the pre-owned commercial vehicle Indian market, which has followed a similar strategy to build a profitable business. This block measures how well the bank is able to segment the market and deliver products as per the needs of the identified segments. The core competencies benchmarked in this block are:
- Product Development
- Market Segmentation
For example within Product Development the criteria are:
- Development process
- Competitive relevance
Product Distribution Channels – Branch based distribution systems are the traditional distribution channels, but have now outlived their relevance by over a decade. In this age a multi channel approach leveraging on the existing branch is more prevalent amongst leading banks. The ability of a bank to build a mass market relationship based selling model drawing on leading practices from both retail and corporate banking is critical here. The core competencies benchmarked in this block are:
- Sales structure and strategy
- Sales process and systems
- Use of Business intelligence
- Channel network usage
For example within Sales structure and strategy the criteria are:
- Sales organization
- Sales culture
- Role of relationship managers
- Skill training
Technology – With the dual aim of providing efficient cost effective acquisition and service, and maintain a profitable portfolio, the use of technology plays a crucial part in the quest to build a successful MSME portfolio. Technology is used to automate to cut costs and reduce response times, and to capture and churn data to build a data centric organization. The core competencies benchmarked in this block are:
- Analytical capabilities
- MIS capabilities
For example with Analytical capabilities the criteria are:
- Data capture
- Data storage
Using diagnostic tools like MSME Assess increase the chances that banks do not work on only the easiest and the most visible criterion, but get a bang for their buck when spent after a holistic analysis of the tool’s output.