Credit institutions’ exposure to SMEs has grown significantly in recent years (albeit from a low base) and currently comprises an important part of their loan portfolio. Asobancaria estimates that SME exposure 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 credit institutions. As much as one-fourth of all SME credits is supported by government programs, particularly FNG guarantees and Bancóldex rediscounting. Although data on non-performing SME loans is not available for these institutions, existing evidence suggests that they are relatively low.

SMEs represent a sizeable portion of the lending business of most credit institutions, particularly leasing companies; however, there are virtually no banks that currently specialize exclusively (or even predominantly) in SME lending. Market concentration is moderately high, with the market shares for the largest, top 3 and top 5 credit institutions in SME financing (23, 46 and 60 percent respectively) being only marginally higher than those for other credit market segments. However, given the high concentration in the leasing market segment, the provision of leasing services to SMEs is dominated by very few companies, virtually all of which are bank-owned.

The analysis of available background information and of the questionnaires indicates that bank financing to SMEs is becoming a strategic segment for Colombian credit institutions. In particular, growth (perceived profitability, stemming primarily from high loan spreads) is a decisive factor in their decision to target this segment. Cross-selling opportunities, diversification and market saturation were also cited as important drivers for SME involvement. This finding challenges the common belief that there is no interest in lending to SMEs. All interviewed credit institutions believe that the market’s prospects are good and they expect it to continue growing, albeit at a slower pace than recently.

The business and risk management models for SME lending are still relatively underdeveloped, but greater sophistication is expected as the market matures. Banks are adapting their business practices by creating dedicated SME units, typically as part of the Retail Vice Presidency. Branches continue to dominate as distribution channels and specialized SME relationship managers are a relatively recent phenomenon. On-site visits and interaction with the SME owner remain crucial, while credit institutions do a fair amount of reaching out to potential clients by relying primarily on public databases and leveraging cross-selling opportunities. Loan products remain quite standardized and mostly short-term in nature. Leasing is a particularly popular financing product, while the use of factoring is still incipient. There is little differentiation in the treatment of SMEs by size or sector, while few banks have developed niche strategies or products to target specific client types. SME borrowers are analyzed on a case-by-case basis using traditional rating techniques based on both quantitative and qualitative factors; credit institutions have not yet began to use automated credit scoring models in this market segment. Banks typically require collateral (mostly real estate) in order to lend to SMEs, and guarantees from firm owners(“ _aval_ ”) and government programs play a significant role; only a few banks have begun to collect default information that would allow them to measure loss-given-default parameters for SME loans. As a result, Colombia lags behind Argentina and Chile, where more sophisticated business models and practices have been adopted. However, as the SME financing market matures and becomes more competitive, it is expected that Colombian banks will increasingly start to catch up to regional peers.

5