One of the distinct structuring features of SME corporate banking is that promoters are required to be personal guarantors of the facilities.
This structure is not common in large corporate banking for 2 good reasons:
1. SME businesses are controlled by an individual or his/her related parties most commonly family members. While in large corporates, the shareholders are more diverse with majority of them not acting in concert.
2. SME corporate owners treat the assets of the corporates as their own. With no effective check and balance, assets are easily transferred to personal accounts.
Some bankers deem this personal guarantee provided as a moral commitment by the promoters. I would suggest the raison d’etre for this moral commitment is to compel the promoters to commit financially and legally. Thus it is a financial commitment ultimately.
Since it is a financial commitment, sensible bankers will want to find out and verify the personal networth of the promoter/personal guarantor. This step is to determine whether this personal guarantor has the personal financial resources such as cash, liquidable properties, shares in other companies or any other assets to repay all or part of the facilities in the event of financial distress.
In Asia, the SME promoters prefer to keep their networth as closely held secret for many good reasons, including for personal safety and tax planning in high tax regimes.
Therefore bankers will excuse such reticence by referring to vague “respect for the cultural norms in Asia”. When it comes time to enforce the personal guarantee, the bank cannot find sufficient personal assets or in most cases, the personal assets are not identified or easily diverted away from the recovery efforts.
Which part of the bank that the clients are keen to share more about their networth? In fact they are keen to inflate networth for better services?
Private bank!
My advice to SME corporate banking heads in Asia is a simple solution.
Bundle a private bank or mass affluent bank account and service whenever the bank takes on a personal guarantee for SME corporate banking.
The bundling should not be on a mere best -effort basis, or cross-referral. It should be part of the facility agreement that stipulates personal guarantors to open such accounts with the bank.
Why should SME business promoters accept this condition?
It works better for those SME businesses that are growing, requiring additional capital. Banks may find that the leverage is too high and balk in increasing exposure to the SME business.
I have convinced these promoters to open private banking accounts with the bank, using the visibility of their networth as additional credit support for more facilities.
Credit managers have confirmed to me that they will reduce or lend a much lower exposure when they have no visibility of the networth of personal guarantors.
Result?
With a simple bundling of a private bank or mass affluent account for your SME corporate banking clients, you elevate the relationship with the promoters, doing more business for the bank and at the same time with less risks.
You hear it first from here!