# **_5.1.2  Products_**

Banks are currently offering a range of deposit and loan products and other banking services to SMEs. In general, banks are offering a fairly standard menu of products to SMEs that include checking/savings/time deposit accounts and loans for working capital or investment (sometimes with pre-approved limits). Business credit cards are also quite popular, and banks appear to be targeting this segment aggressively as a natural extension of the consumer credit card market. Other banking services such as cash management as well as payroll and social security payment services are also important for SMEs, as they prefer to manage most transactions with a single credit institution in order to minimize payment of the financial transactions tax ( _gravamen a los movimientos financieros_ or GMF).

Loan products are still very standardized and mostly short-term in nature, reflecting banks’ historical experience with SMEs. The loan product variety offered by banks to SMEs is quite narrow and fairly standardized across banks (Figure 5.8). Working capital loans have an average maturity of 6-24 months and floating rates of DTF<sup>44</sup> + 8-12 percent<sup>45</sup> . Investment loans are mostly granted at slightly higher interest rates and with an average term of 3-5 years; some of these represent special Bancoldex-funded credit lines ( _credito de fomento_ ). Most banks also have some sort of short-term overdraft accounts as well as foreign currency-denominated credit lines for trade finance purposes that are indexed to LIBOR. SME lending rates (or rate ranges) and terms are generally determined centrally by Headquarters, and sales personnel have very limited pricing flexibility (Figure 5.9). Current product features such as short maturities, floating rates, standardized pricing, and widespread use of real estate collateral and of personal guarantees (see below), are partly a ‘coping mechanism’ for credit institutions given historical volatility and their insufficient involvement in, or knowledge of, this segment. As the market matures and banks become more familiar with their clients’ needs, greater product customization – as in Chile and, to a lesser extent, Argentina – are expected.

Figure 5.8: SME Product Customization Figure 5.9: Flexibility in Product Pricing <!-- Start of picture text --> 93%<br>Fully standardizedproducts 31% 63% Sales personnel have limited flexibilityin pricing SM E products 92%<br>7%<br>Some tailoredproducts 25%26% Pricing for SM E products is fullystandardized 8%<br>Similar proportion 0% Sales personnel have full flexibility in<br>of standardized 0%<br>0% pricing SM E products<br>and tailored<br>products 8%<br>Argentina Chile Colombia<br><!-- End of picture text --> _Source: Authors’ analysis of bank questionnaires (simple averages across all banks) and World Bank (July 2007). Note: Figure 5.8 does not add up to 100 percent for each country because some credit institutions did not provide a response._

> 44 The DTF (“ _Depósito a Termino Fijo_ ”) is the 90-day deposit certificate, which is used as a benchmark reference rate for pricing most loans in Colombia. The current DTF rate is around 9 percent. 45 Credit institutions focusing primarily on medium-sized firms report lower rates (e.g. DTF + 4-5 percent).

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