May 27, 2020 / 09:07

Five ways banks can help Asia’s smallest businesses survive Covid-19

The road to recovery post-Covid-19 is full of risks for Asia’s banks. They need to innovate and expand their services to help rebuild the small businesses that provide a lifeline to Asia’s poor.

Before Covid-19, poverty rates were the lowest in recorded history and businesses were looking for profits at the “bottom of the pyramid” as the poor increased their spending power. Micro and small enterprises – vastly informal, but the key to creating 70%-95% of new jobs in Asia– were helping drive growth through improved access to finance.

 For Asia to rebound, support for small and micro enterprises is critical. Photo: Lisheng Chang

This rise in socio-economic status is now being crushed by Covid-19. The International Labor Organization reports that 1.6 billion workers in the informal economy – nearly half of the global workforce – are in immediate danger of having their livelihoods destroyed.

The banks that could throw a lifeline to these businesses and their workers are also under stress. They are being asked to give loan moratoriums to customers while there is no guarantee that their own debt payments will be waived. Governments have tried to help the banks, with lowered cash reserve requirements and bond purchases, with more measures likely to come.

How can banks weather the pandemic and serve the micro and small businesses that create most of Asia’s jobs?

Get strong. Banks can’t serve the neediest customers without being strong themselves. In an era of “survival of the fittest”, being fit means rapid deployment of business continuity plans, boosting cash in hand, and avoiding the debt trap of borrowing short to lend long. Shareholders are vital partners now to bolster confidence and boost capital in order to weather an expected wave of bad loans ahead. This is the time when public and private sector credit guarantee programs are most needed to pool risk and help restart businesses.

Cash is golden. Micro and small enterprise lenders have always known this, especially for those active in the challenging unsecured business loans segment. Serving informal markets relies on an ability to assess cash flow net of hard-to-track debts that often lie outside the formal financial system. While in-person assessment methods have fallen somewhat out of favor in an era of social distancing, they are key to restarting the credit engine. When it comes time to unlock micro and small enterprise disbursements, credit officers are the essential workers on the front lines to perform business health checks and unlock prudent lending decisions.  

Go digital. While cash is still golden, that doesn’t mean banking should depend on the exchange of bills, especially given the shift away from touch-related exchanges. The G20 push for innovative and digital financial inclusion is ongoing, but it took nationwide lockdowns to break many of the cash-dependent collection methods in microfinance. Yet some micro and small enterprise lending models still rely on paper-based records and post-dated checks, which are slow to process as banks work with skeletal staffing. Markets such as India have strongly enabled frameworks for digital payments, and India has set a target to reach 15% transaction turnover as a share of GDP by 2021. Covid-19 should hasten the transition, particularly relating to the flow of mobile money payments and to the digitization of micro and small loan applications. Upfront investments in tech architecture could pay off through lower credit review costs, more accurate cloud-based records, better remote access for clients and minimized operational risk going forward.

Alternative channels. Regulators have allowed mobile wallets, web services, and non-bank agent networks, but more alternative partnerships are needed. This includes bank alliances with “fast moving consumer goods” companies, telecom providers and other non-traditional actors with strong distribution channels to reach the last mile, such as India’s kirana (local neighborhood) stores, where more than 90% of retail sales take place. Banks need to improve their consent-based use of digital and supplier credit data to better serve the millions of neighborhood stores reaching more than a billion low-income consumers. The old proverb “If you want to go fast – go alone. If you want to go far – go together” still holds true.

Add value. Well before Covid-19, banks needed to create higher-value add-on experiences to retain customers. Even in developing markets where only 20% have access to formal loans, banks need to provide more than access to finance. With micro and small enterprise debt service capacity directly impacted by frozen economic activity, finding other value propositions is key. One important timely add-on is "government-to-person” digital transfers to subsidize livelihoods. Banks can also work with women’s groups to mobilize savings and industry associations to foster cluster-based learning and business skills upgrades. Insurance distribution is another value proposition that banks can offer. While bank accounts have become more universal, only one third of adults in India have life insurance; even fewer have affordable health or business-risk products. In times of crisis, clients will reward the banks who help them recover and emerge stronger in the face of business challenges ahead.

Banks know that the road to recovery post-Covid-19 is full of risk. In the eye of the storm, they need to innovate and expand their services to help rebuild the small businesses that provide a lifeline to Asia’s poor.

Susan Olsen is Senior Investment Specialist at ADB.