This month’s article has a different twist to it — it is based on a survey I conducted of bankers, with a view to getting it straight from the horses’ mouth and for businessmen to take note of. It covered a few hot potato issues — their concerns, assessments of the current state and prediction of the immediate future of the SME lending business.

I will discuss the results of the survey in two articles.

The idea was to present to SME owners real feedback of those who make or influence lending decisions. Businessmen hear opinions from their bankers, which often are tainted with a salesman’s enthusiasm or despondence, depending on their relationships. The idea was to seek opinions — minus such bias — to enable businessmen to listen, take note and most importantly, act.

The results were quite disturbing, although not entirely surprising. Businessmen are painfully aware that banks have started tightening screws and lending with extreme caution.

Here are the real reasons why:

Question 1

I asked what bankers felt about the condition of the SME segment in general. Multiple-choice questions varied from stable to deteriorating with a couple of options for fence-sitters.

Fifty-six per cent thought it was deteriorating and 19 per cent thought it was at a “steady state”. We may assume the latter group will adopt a wait and watch policy, which combined with the 56 per cent who are probably going extremely slow, makes for a dull lending scenario.

Question 2

To “what do you think will be banks’ strategies in the SME space, over the next 12 months?”, 44 per cent thought lending would resume and recover slowly. But 25 per cent thought it would shrink and another 25 per cent that it would stay at current levels.

Only 6 per cent forecast recovery and robust lending growth. This contrasts with 56 per cent opining in question 1 that the situation was deteriorating.

Question 3

As to “what were the main impediments to growth in the SME lending space”, respondents were asked to rank choices. The results are very worrying — both for lenders and borrowers.

Fifty-three per cent of respondents said that the most serious was the lack of faith in the business models of SMEs in general. This is extremely disturbing, but has to be seen in the context of the remaining responses.

Twenty per cent said they had no faith in the veracity of financial statements provided by SMEs and this came in ranked second.

Thirteen per cent ranked a fear of fraud at No. 3. Tied in 4th place was an inability to identify clearly all risks associated with SME borrowers and an inability to verify if a business was genuine.

The underlying theme here is lack of faith and the inability to adequately verify business models to reaffirm faith. Basically, most bankers do not believe a lot of what they see and hear from SME owners any more.

The wilful defaults and frauds that occurred last year has eroded faith. For businessmen, this will prove to be an uphill battle to win back confidence. I have written in the past of industry and trade associations having to step up to the plate and take collective action. Nothing significant has happened on this front and one cannot fathom why.

The next two questions asked what bankers thought of audited financial statements, and the part played by owners in producing them. The results are distressing.

A staggering 81 per cent felt they could trust only 50 per cent of audited statements of SMEs. A surprising 6 per cent actually said they did not trust a single balance sheet as authentic. It is sad reflection on audit firms as well.

This has to be seen together with the results of the next question that asked bankers what percentage of SMEs they felt doctored or fudged their numbers. Here, 56 per cent felt that up to 60 per cent of SMEs did so!

And 31 per cent felt that between 60-80 per cent of SMEs were guilty and a not insignificant 13 per cent felt that 80-100 per cent of SMEs manipulated their numbers.

What can be made from all this? The fact that banks are going extremely slow on the SME front is now common knowledge. The survey throws up the real reasons why.

The current environment of fear, extreme caution and reluctance to lend has been caused by a severe crisis of faith. Simply put, bankers don’t believe at least half the financials they are given, feel they cannot trust a large percentage of businessmen any more and fear they have no way of verifying the authenticity of business models.

Business owners, you have an uphill battle ahead of you. In the second article I will discuss the remainder of the survey and some tips for owners to assist in wading out of this swamp of mistrust.

The writer is Managing Director of Vianta Advisors.