channels, but also perform some back-office functions when dealing with SMEs (Figure 5.2).While the initial stages of granting a loan are usually decentralized, functions such as loan approval (either for all loans or above a minimum loan size), risk analysis, monitoring of credit exposure, and loan recovery are centralized. However, it is common practice among banks to pull in their commercial area into loan processing tasks or credit exposure monitoring, as these functions are not yet automated or standardized, and still require considerable manual input to operate. As further explained below, these features are additional indicators of a business model in transition and of a market that is still underdeveloped. Another indicator of the relative immaturity of this market is the fact that the large majority of interviewed credit institutions is not yet able to quantify the contribution of the SME segment in terms of income (from loans, deposits and fee-based services), costs and risks to overall financial performance.

Specialized SME Relationship Managers (RMs) are a recent phenomenon, while onsite visits and interaction with the SME owner remain crucial business practices. The more traditional banking model based on on-site visits and direct interaction with the company owner dominates in most banks, given some of the inherent features associated with this segment (informality, lack of reliable financial information etc.). While banks are adopting the figure of specialized RMs for SME clients, the practice of assigning them to specific SMEs varies widely; some banks do not have dedicated SME RMs, others only assign them to specific clients (e.g. larger or more profitable SMEs), while a few banks assign all their clients to a RM (even if it means that each RM is responsible for hundreds of SMEs). In contrast to Colombia, the RM model is more advanced in Argentina and Chile, where RMs are crucial for new client development and coordination between headquarters and branches<sup>43</sup> . In terms of incentives to sales personnel, most interviewed credit institutions mentioned a variable element component in RM compensation based on criteria such as client profitability, loan volume and cross-selling business (Figure 5.3).

Figure 5.3: Incentives to Sales Personnel Describe the incentives to sales personnel to lend to SMEs, in terms of how they are evaluated Figure 5.4: Reaching out to SME Clients <!-- Start of picture text --> How much reaching out to SMEs does the bank have to do?<br><!-- End of picture text --> <!-- Start of picture text --> By profitability 7 5% Despite strong demand for our SM E<br>products we still do a fair amount of 63%<br>By loan volume granted 63% reaching out<br>By successful cross-sale of other bankingproducts 38% Other 38%<br>Other 25%<br>The bank has a strong demand so no<br>By non-performing loans 25% reaching out is required to SM Es 13%<br>By number of clients 25%<br>Demand is weak so we have to actively<br>0%<br>By market share target 13% seek clients by reaching out to them<br><!-- End of picture text --> _Source: Authors’ analysis of bank questionnaires (simple averages across all banks)._ _Note: Figure 5.3 does not add up to 100 percent because some credit institutions provided more than one response. ‘Other’ in Figure 5.3 means that sales personnel are evaluated in terms of other metrics, such as deposits and fees generated. ‘Other’ in Figure 5.4 means that the credit institution leverages cross-selling opportunities from existing clients in addition to reaching out for new clients._ 43 In both Argentina and Chile, RMs look for new clients and prepare SME credit applications. In Chile, for instance, RMs are being trained in risk management so as to perform an initial filtering of the SME pool and to have credit approved more expeditiously. See The World Bank (July 2007) for more details.

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