# **3. Stylized Facts on Banks’ Involvement with SMEs**

## **3.1 Banks’ Definition of SMEs**

The SME definition used by credit institutions is generally based on annual sales, but differs substantially between domestic and foreign banks. In particular, all interviewed credit institutions are using annual turnover in their classification of borrower type, while only one bank also used total assets. This drives a wedge between the SME universe based on the legal definition and the one that is attended by the banking system. As can be seen in Table 3.1, the range for Colombia appears relatively large, but this can be attributed to the inclusion of international banks that have adopted a common (and rather broad) SME definition across their global operations. By contrast, most domestic Colombian banks define SMEs within a much narrower annual sales range of around US$0.1-5 million, with differences largely determined by their respective target market. This range is quite narrow compared to the one used by banks in Argentina and Chile, particularly with regards to the definition of a medium-sized firm.

Table 3.1: SME Definition Used by Credit Institutions

||**Lower Bou**|**nd of Sales to**<br>**(US$ Million)**|**Define a SE**<br>|**Upper Bou**|**(US$ Million)**<br>**nd of Sales to**|**Define a SE**|
|---|---|---|---|---|---|---|
||Average|Min|Max|Average|Min|Max|
|**Argentina**|0.3<br>$|0|1.3<br>$|4.6<br>$|0.8<br>$|12.0<br>$|
|<br>**Colombia**|0.4<br>$|0|2.5<br>$|2.5<br>$|0.5<br>$|10.0<br>$|
|**Chile**|0.1<br>$|0|0.2<br>$|1.6<br>$|0.9<br>$|2.3<br>$|
||**Lower Bou**|**(US$ Million)**<br>**nd of Sales to**|**Define a ME**|**Upper Bou**|**(US$ Million)**<br>**nd of Sales to**|**Define a ME**|
||Average|Min|Max|Average|Min|Max|
|**Argentina**|4.6<br>$|0.8<br>$|12.0<br>$|30.0<br>$|10.0<br>$|75.0<br>$|
|<br>**Colombia**|2.5<br>$|0.5<br>$|10.0<br>$|12.8<br>$|3.1<br>$|50.0<br>$|
|**Chile**|1.6<br>$|0.9<br>$|2.3<br>$|23.8<br>$|2.0<br>$|50.0<br>$|

_Source: Authors’ analysis of bank questionnaires, World Bank (July 2007). Note: SE and ME refers to Small- and Medium-Sized Enterprise respectively. Simple averages are used in the above estimation._

## **3.2 Extent of SME Lending**

Credit institutions’ exposure to SMEs has grown significantly in recent years and currently comprises an important part of their commercial loan portfolio. An exercise by Asobancaria on the size of the SME credit market (both loans and leases) based on the legal definition of SMEs shows a rapid increase from a low base in 2003 (Figure 3.1). According to this exercise, the share of SME exposure had almost doubled in less than 4 years and had reached almost COP 17 trillion (around US$8.5 billion, or 5 percent of GDP) as of March 2007, which is equivalent to more than one-fourth of the total commercial loan and lease portfolio of Colombian credit institutions. In fact, this figure is likely to underestimate the true size of the market given the methodology that is used<sup>24</sup> ;

> 24 Asobancaria has compared the tax identification numbers of 45,000 borrowers in its credit bureau (CIFIN) against those found in the database of Confecámaras. Only credits to those firms identified as

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