SUMMER PROJECT REPORT

ON

“Banking Requirements of Small and Medium Enterprises

(SMEs) in the IT Industry in Bangalore, and the ways in which
SBI can tap this market”
 2

PROJECT REPORT
ON
“Banking Requirements of Small and Medium Enterprises (SMEs) in the
IT Industry in Bangalore, and the ways in which SBI can tap this market”

submitted in partial fulfillment of the requirement for the award of

POST GRADUATE DIPLOMA IN BUSINESS MANAGEMENT (PGDBM)

BY

Kavitha Aruldass
Roll No. 40, PGDBM, 11th Batch (2005-2007)

Under the guidance of

Mr. S. Narayanswamy
DGM (SME, State Bank of India)
Local Head Office, Bangalore

Xavier Institute of Management & Entrepreneurship

Electronics City-Phase II, Bangalore-560100

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CERTIFICATE

I hereby affirm that this project report titled “Banking Requirements of

Small and Medium Enterprises (SMEs) in the IT Industry in Bangalore,
and the ways in which SBI can tap this market” being submitted to
Xavier Institute of Management & Entrepreneurship (XIME),
Bangalore in partial fulfillment of the requirement for the award of the
Post Graduate Diploma in Business Management is entirely carried out
by me.

Bangalore
Date: Kavitha Aruldass

Forwarded By

Project Guide Project Guide

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ACKNOWLEDGEMENT
This project report on SME Banking was a very rich learning experience in understanding
the whole business of SME Banking, especially the fast emerging IT SME (SMEs in the
Information Technology Industry) market. We offer our sincere gratitude to State Bank of
India, Local Head Office, Bangalore in general and Mr. S. Narayanswamy, Deputy
General Manager, SME in particular for giving us an opportunity to conduct a study in
this sector which has got so much potential. Also, we thank him for his continuous
guidance throughout the project.

We take this opportunity to also thank all the senior officials of SBI, Local Head Office
for listening to our presentation patiently and thus giving us a platform to showcase our
research findings and recommendations.

We thank all our batch mates who helped us with their suggestions at different times
during the project. We also thank all the Finance Managers of the IT SMEs who took the
pain of filling the questionnaire and thus contributing with vital inputs. We also thank the
banks who gave us access to interview their SME managers.

At last but not at all the least, we express our sincere gratitude to the Director and the
Dean, XIME for giving us an opportunity to undertake this two month long project. A
special mention has to be made at this point of time about our internal guides, Prof. Aram
Valarthan and Prof. S.P.Srinivasan who were a source of continuous guidance and
encouragement throughout the project. Without their apt comments and suggestions this
project wouldn’t have been successful. We express our sincere gratitude to them.

Kavitha Aruldass

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TABLE OF CONTENTS
Sl. Title Page No.
No
.
1 List of Tables 06
2 List of Figures/Charts 07
3 Executive Summary 08 - 15
4 Introduction
 Introduction to SMEs
 Overview of the Indian IT Industry 16 - 28
 SMEs in the IT Industry
 State Bank of India (SBI)
5 Problem Formulation
 Need for the Study
 Problem Definition 29 – 32
 Research Objectives
 List of Information Required
6 Research Methodology
 Research Design
 Sources of Data 33 – 35
 Instruments of Data Collection
 Sampling Design
7 Analysis, Findings and Interpretation
 Demographic Profile of IT SMEs
 Findings from IT SMEs 36 – 60
 Findings from Banks
8 Conclusions 61 – 64
9 Recommendations 65 – 68
10 Limitations 69 – 70
11 Annexure
 Annexure-A
 Annexure-B 71 - 79
 Annexure-C
12 Bibliography 80

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List of Tables

Sl No Title Page No
1. Highlights of the Indian IT Industry : NASSCOM McKinsey Report 2005 20
2. India based service provider landscape : NASSCOM McKinsey Report
2005 22
3 Percentage of Turnover of IT SMEs coming from Exports 44
4. Expectation of Growth Rates by IT SMEs 45
5. Ranking of top demands of IT SMEs from the Commercial Banks 47
6. Ranking of Factors Important while selecting a bank: By prevailing IT 48
SME customers of SBI
7. Evaluation of SBI by its prevailing customers 49
8. Ranking of Factors Important while selecting a bank: By IT SME 49
customers of Other Banks only
9. Evaluation of Other Banks apart from SBI by IT SMEs 50
10 Ranking of Factors Important while selecting a bank: By IT SME 50
companies transacting with both SBI and other Banks
11 Overall Ranking of Factors perceived important while selecting a bank by 52
an IT SME
12 Ranking of Things that a Bank looks for in an SME before lending 56
13 Other Services provided by Banks to SMEs 58

List of Figures

Sl No Title Page no

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1. Demographic Profile of IT SMEs 37 – 38

2. Relationship b/w Annual Turnover and Year of Establishment
of an IT SME 39
3. Relationship b/w Year of Establishment and Area of Operation
of an IT SME 40
4. Relationship b/w No. of Employees and Year of Establishment
of an IT SME 40
5. Current sources of Working Capital Finance for an IT SME 41
6. Source of Working Capital Finance Vs. Area of Operation 41
7. Current sources of Long-term Finance for an IT SME 42
8 Sources of Long-term Finance Vs. Area of Operation 42
9 Market Share of Banks as Main Bankers to IT SMEs 43
10 Market Share of Banks taking care of Salary A/Cs of IT SMEs 43
11 Market Share of Banks in the IT SME FOREX Market 44
12 Expected Growth Rates Vs. Period of Establishment 45
13 Expected Growth Rates Vs. Area of Operation 45
14 Top Requirements of IT SMEs 46
15 Percentage distribution of IT SMEs transacting with different 48
categories of Banks
16 Comparison of SBI with Private Banks 51
17 Comparison of SBI with other Public Sector Banks 51
18 Overall Comparison among different categories of banks 53
19 Overall Acceptance Level of SBI 54
20 Acceptance Level of SBI by its prevailing IT SME customers 55

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EXECUTIVE SUMMARY

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Objective :
SMEs stand for Small and Medium Enterprises. GOI/RBI has taken several initiatives to
support the SME sector by formulating various schemes and policy guidelines for
promotion and development of SME units. The Union Finance Minister, Mr. P.
Chidambaram announced certain measures in Parliament on Aug.10, 2005 for stepping
up credit to small and medium enterprises, which is required to be implemented by all
public sector banks. The objective is to double the credit flow to SME sector from Rs.
6,76,000 million in 2004-05 to Rs. 13,52,000 million by 2009-10. The banks are
required to achieve a minimum of 20% growth year-on-year basis to SMEs.

In that regard, SBI (State Bank of India) is looking for markets with great SME potential.
Now, the IT industry has been doing very well and SMEs in the IT industry too are doing
very well. Karnataka, especially Bangalore, being the hub of IT related activities,
contributes a major share. According to the findings of UBS-Asia Business Monitor
(UBS-ABM II) latest survey, Indian SMEs (Small and Medium Enterprises) leaders
consider the most important industry sectors to be IT&T (93 percent), building and
construction (89 percent), and financing, utilities and energy (82 percent each). The
survey also pointed out that 70 percent of Indian SMEs have said that their companies
have credit and finance needs on an ongoing basis. This is the highest percentage in
the Asia-Pacific region. Also, according to NASSCOM estimates, approximately 50-60
percent of the industry revenues will be from SME segment by 2008. Currently this
figure is less than 10-15 per cent.

As the future growth story of India is going to be scripted in a big way by these SMEs,
and IT (Information Technology) is expected to be the most important industrial sector,
with the prevailing credit and finance needs of these SMEs a need was felt to undergo a
study to find the Banking requirements of SMEs in the IT industry in Bangalore, for
Bangalore is the hub of all the IT related activities. Also, the scope of the study entails the
ways in which State Bank of India (SBI) can tap this potential market by fulfilling the
requirements of these SMEs, with due consideration to ever growing competition in the
Banking sector. The research work done thus had the following objectives to be attained :

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o To study the market potential of IT SMEs

o To find the different market segments in this IT SME market
o To study the main requirements of IT SMEs
o To study the FOREX requirements
o To study the requirements of other value added services
o To study the market perception of SBI, market being the SMEs
o To study the SME products & services offered or planned to be offered by
other banks with special focus on IT Industry
o To study what performance factors in case of Banks are important for the
SMEs
o To do a comparative study of the Banks
o To recommend ways in which SBI can tap this market

Conclusions/Results :
1. IT SME is a big and fast growing potential market. NASSCOM
expects them to form 50 to 60% of the IT Industry by 2008 from
the current figure of 10 to 15%. Also, their own expectation of
growth is approximately 58% year on year, as found from the
research. There is a big market potential in Salary A/Cs and FOREX.
2. There are different Banking Requirements for different market
segments in IT SMEs
3. In terms of being the main lenders to IT SMEs, SBI has a good market
share of 33%. It is the joint market leader with State Bank of Mysore.

4. The market leader in the Salary A/C market is Citibank with 40%
market share followed by ICICI Bank at 22%. SBI has 6%.

5. The market leader in FOREX IT SME market is Citibank with 45%

market share. SBI has 16%.

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6. The top four requirements of IT SMEs are : Infrastructure, Skilled

People, Marketing needs and Funds in that order of ranking.

7. Top three demands of IT SMEs from commercial banks are : More

Affordable Interest Rates, Better Customer Focus and Online Banking.

8. The most important factors for IT SMEs while selecting a bank are :
Time Taken in Settlement of Transactions, Quickness of Decision
Making, Understanding and appreciation of the problems of the
company, Customization of Products and Past Relationship with the
Bank.

9. SBI has an excellent Brand Name and Image but it loses heavily to the
Private Banks on the important performance parameters mentioned in
the previous point. It has to be noted though that Brand Image was
rated as the least important parameter.

10. Customer awareness about SBI is low. Many SMEs are not aware of
the FOREX products offered by it and that it has Online banking
Facility.

11. Acceptance of SBI among these SMEs is around 66%. But the
alarming thing is that only 43% of its existing customers are willing to
continue with it and 57% are not sure about it, which is a negative shift
for SBI and thus it has to take care of retaining its customers.

12. Almost all the banks are focusing on SMEs and view IT SMEs as
potential target market.

13. Total advances made to IT SMEs is around 1 to 2% of SME lending

which is about 30% of the total lending.

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14. Private Banks are already doing what this research has come out with.
They are already targeting only FOREX and Salary A/Cs of Software
and BPO SMEs.

15. Nationalised Banks including SBI are underestimating the growth

potential of IT SMEs for they expect an annual growth of 5 to 7% in
them. Private banks are more optimistic with HSBC expecting 25%
growth per annum. The reality though is that SMEs themselves expect
an average figure of 58% year on year.

16. Important factors for banks before lending to IT SMEs are :

Performance in the past three years, Infrastructure, The Promoter and
Purpose of loan in that order of ranking for Nationalised banks. Private
banks depend upon the recommendation of their Risk Management
Group.

17. Private banks understand the requirements of IT SMEs better than

nationalized banks.

18. USPs of private banks are based on the performance parameters while
those of nationalized bank on their Size, Status and Social
Commitment.

19. Banks are not providing enough advisory and Project Consultancy
Services while IT SMEs really need them.

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Recommendations :
1. SBI should target Software and BPO SMEs for their Forex and Personal banking
of employees. They should target Hardware companies for Working capital and
Long-term loans primarily but see this market segment in totality and take care of
their all the banking needs.
2. SBI should adopt a strategy of “Challenger” to Citibank in the FOREX and Salary
A/C markets. They should also first of all carefully study the products, services
and delivery model of Citibank.
3. Ways of fulfilling top requirements of IT SMEs :
a. Infrastructure : Infrastructure requirements are in terms of office
premises & space and computer& equipments. SBI can collaborate with
Builders and developers to design an easy repayment product called
Infrastructure loan. It can also collaborate with companies like IBM and
HCL Technologies to provide and computer peripherals. SBI should
provide instant loan for the same.
b. People : SBI can take care of funding the training expenses of IT SMEs.
Also, it can design a way of encouraging students availing Student
Education Loans from SBI to think of IT SMEs as a career option. This
way it will be satisfying the needs of both the clients and as a mediator it
can charge commission.
c. Marketing : Hardware companies are mostly focusing on the domestic
market and even NASSCOM has suggested them to get hold of domestic
market first. Now, SBI can act as an interface between these hardware
SMEs and its other clients who will be interested in those products. This
way these SMEs will get a way to showcase their products. SBI can also
provide Marketing/Selling Consultancy services in the form of Market
Support Groups. They can also use their website to showcase the products
on the lines of E-bay. For software companies, same thing can be done
through overseas branches of SBI.
d. Funds : SBI has interest rates which is less than most other banks if not
all. In terms of products and terms and conditions also it is quite good, but

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it needs to improve upon the delivery quite a lot. Also, it can come out
with customized products for IT SMEs depending upon the market
segment they are targeting. SBI can even think of Performance based
interest rates.

4. Before acting on all this though, to manage risk, SBI should pick companies on
the recommendations of its risk management group and credit rating by SMERA (
SME Rating Agency of India). SBI can even look to pay the nominal charges of
getting SMEs credit rated. And once it decides that this is the company to go for,
it should take care of all the banking needs of the company, like a business partner
sharing the risk, i.e. it should act as a venture capitalist with long-term investment
plan and outlook.
5. SBI needs to improve quite a lot on its delivery process. It should train its staff for
being more customer focused and customer friendly. They must show urgency in
solving problems of the customers. SBI can have a separate one point contacts in
terms of Relationship Managers. Also, it can have a dedicated webpage for faster
action on problems of IT SMEs on a high priority basis.
6. SBI should conduct a study on applying Lean Management Principles in its
operations and services. That study should come out with recommendations as to
how SBI can reduce its delivery or service time by doing away with steps that are
wasting time.
7. SBI should benchmark its Online Banking capabilities with banks like Citibank as
only Online banking is very important for IT SMEs.
8. SBI should create awareness about its technological upgradations, changing
attitude towards customers and should position itself more as “The Problem
Solver” on the performance parameters rather than the size and history of the
organization. It means it should couple its Brand name with performance.
9. It can even think of applying Customer Relationship Management software to
focus in a better way on its customers. It can use its website for taking feedbacks
and suggestions from the existing customers.

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10. Private banks are providing Cheque Bounce Protection Facility which SBI is not.
To strengthen relationship, it should also provide this. Also, what it can do is that
they can have SMS alarming service to intimate the company that they are
running out of cash and they should hurry up to credit their account before the
bank closes for the day.
11. At last, SBI needs to bring a drastic change in attitude towards its customers. It
has shown its interest in doing so, now it needs to act quickly, again time is the
key.

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INTRODUCTION

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Introduction to SMEs :

SMEs stand for Small and Medium Enterprises. With the advent of planned economy
from 1951 and the subsequent industrial policy followed by Government of India, both
planners and Government earmarked a special role for small-scale industries and medium
scale industries in the Indian economy. Due protection was accorded to both sectors, and
particularly for small scale industries from 1951 to 1991, till the nation adopted a policy
of liberalization and globalization. SMEs always represented the model of socio-
economic policies of Government of India which emphasized judicious use of foreign
exchange for import of capital goods and inputs; labour intensive mode of production;
employment generation; non-concentration of diffusion of economic power in the hands
of few (as in the case of big houses); discouraging monopolistic practices of production
and marketing; and finally effective contribution to foreign exchange earning of the
nation with low import-intensive operations. It was also coupled with the policy of de-
concentration of industrial activities in few geographical centers.

It can be observed that by and large, SMEs in India met the expectations of the
Government in this respect. SMEs developed in a manner, which made it possible for
them to achieve the following objectives:
• High contribution to domestic production
• Significant export earnings
• Low investment requirements
• Operational flexibility
• Location wise mobility
• Low intensive imports
• Capacities to develop appropriate indigenous technology
• Import substitution
• Contribution towards defense production
• Technology – oriented industries
• Competitiveness in domestic and export markets

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At the same time one has to understand the limitations of SMEs, which are as follows :
• Small and medium enterprises (SME), particularly the tiny segment of the
small enterprises, have inadequate access to finance due to lack of
financial information and non-formal business practices. SMEs also lack
access to private equity and venture capital and have a very limited access
to secondary market instruments.
• SMEs face fragmented markets in respect of their inputs as well as
products and are vulnerable to market fluctuations.
• SMEs lack easy inter-State or international market access.
• The access of SMEs to technology and product innovations is also limited.
There is lack of awareness of global best practices.
• SMEs face considerable delays in the settlement of dues/payment of bills
by the large buyers.

In spite of these limitations, the SMEs have made significant contribution towards
technological development and exports. SMEs have been established in almost all-major
sectors in the Indian industry such as:
•
Food Processing
•
Agricultural Inputs
•
Chemicals & Pharmaceuticals
•
Engineering; Electricals; Electronics
•
Electro-medical equipment
•
Textiles and Garments
•
Leather and leather goods
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•
Meat products
•
Bio-engineering
•
Sports goods
•
Plastics products
•
Computer Software, etc.

GOI/RBI has taken several initiatives to support the SME sector by formulating various
schemes and policy guidelines for promotion and development of SME units. The Union
Finance Minister, Mr. P.Chidambaram announced certain measures in Parliament on
Aug.10, 2005 for stepping up credit to small and medium enterprises, which is required
to be implemented by all public sector banks. The objective is to double the credit flow
to SME sector from Rs. 6,76,000 million in 2004-05 to Rs. 13,52,000 million by 2009-
10. The banks are required to achieve a minimum of 20% growth year-on-year basis
to SMEs.

At present, the definition of an SME stands as under :

“ A small scale industrial unit is an industrial undertaking in which investment in
Plant & Machinery, does not exceed Rs.10 million except in respect of certain specified
items under hosiery, hand tools, drugs & Pharmaceuticals, stationery items and sports
goods where this investment limit has been enhanced to Rs.50 million. Units with
investment in plant and machinery in excess of SSI limit and up to Rs.10 million may
be treated as Medium enterprises (ME). The exact definition will be enacted after
passing of the legislation of SME by the parliament. Only SSI financing will be
included in Priority Sector.”
Source: Reserve Bank of India

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Overview of the Indian IT industry :

Worldwide spending on IT-ITES witnessed steady growth in 2005, on the back of
healthier spending across key markets of the US and Western Europe, and strong growth
in emerging markets. Outsourcing continued to be the primary growth engine with global
delivery forming an integral part of the strategies adopted by customers as well as service
providers. The key highlights of the performance of the IT-ITES are as follows:

USD billion FY 2004 FY 2005 FY 2006E

IT Services 10.4 13.5 17.5

-Exports 7.3 10.0 13.2

-Domestic 3.1 3.5 4.3

ITES-BPO 3.4 5.2 7.2

6.3
-Exports 3.1 4.6
0.9
-Domestic 0.3 0.6

Engineering Services and R&D,

Software Products 2.9 3.9 4.8
3.9
-Exports 2.5 3.1
0.9
-Domestic 0.4 0.7

Total Software and Services 16.7 22.6 29.5

Revenues

Of which, exports are

12.9 17.7 23.4

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Hardware 5.0 5.9 6.9

Total IT Industry (including

Hardware) 21.6 28.4 36.3

Source: NASSCOM McKinsey Report 2005

Growth in Revenues

 Indian IT-ITES industry continues to chart remarkable double-digit growth

for the nth successive year and is expected to exceed USD 36 billion in annual
revenue in FY 2005-06, a growth of nearly 28 per cent.
 The Indian IT-ITES industry has grown at a CAGR of over 28 per cent
since FY 1999-2000. Over the same period, the industry’s contribution to the national
GDP has risen from 1.9 per cent in FY 1999-2000 to a projected 4.8 per cent in the
current fiscal.
 As in the previous years, IT services continue to account for a lion’s share
of the Indian IT-ITES industry, contributing over 47 per cent of the total industry
revenue in FY 2004-05.
 The hardware, ITES-BPO and engineering and R&D Services segments
accounted for 21 per cent, 18 per cent and 14 per cent respectively.
 The segment composition of industry revenues is likely to remain
unchanged – weighed towards the services (IT + ITES-BPO) and software segments
in FY 2005-06.

Increasing Exports

 Export earnings accounted for 64 per cent of the total IT-ITES aggregate
in FY 2004-05. Strong fundamentals including a large base of skilled talent,
demonstrated quality and service delivery expertise at a significant cost advantage
and an enabling environment have ensured that India attracts a disproportionately

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larger share of the global IT-ITES demand for off shored services – and continues to
drive India’s export-led growth.
 IT-ITES exports from India grew from USD 13.3 billion in FY 2003-04 to
USD 18.2 billion in FY 2004-05. It is estimated that total IT-ITES exports from India
will exceed USD 23.9 billion in the current fiscal (FY 2005-06).
 Software and services exports (excluding hardware) are projected to grow
at 32 per cent in the current fiscal.
 India’s stock of foreign exchange earnings is amongst the highest in the
world, with reserves having risen from USD 5.8 billion in FY1990-91 to USD139
billion in January 2006.

India-based Service Provider Landscape :

Category No. of Share of India’s total Performance

players IT/BPO export
revenues
Tier I Players 3-4 • 45% of IT Services Revenues greater than
• 4-5% of BPO USD 1 billion
Tier II IT Players 7-10 • 25% of IT Services Revenues USD 100
• 4-5% of BPO million-USD 1 billion
Offshore operations of 20-30 • 10-15% of IT Revenues USD 10
Global IT majors Services million-USD 500 million
• 10-15% of BPO
Pure play BPO providers 40-50 • 20% of BPO Revenues USD 10
million-USD 200 million
(Excluding top provider
with USD 500 million)
Captive BPO units 150 • 50% of BPO Revenues USD 25
million-USD 150 million
(top 10 units)
Emerging players >3000 • 10-15% of IT Revenues less than USD
Services 100 million (IT)
• 5% of BPO Revenues less than USD
10 million (BPO)

Source: NASSCOM McKinsey Report 2005

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SMEs in the IT Industry :

Despite the enormous challenges confronting the Indian software and services industry,
strong fundamental and core value propositions led to it outperforming all other sectors in
the country.

The Indian software and services industry turned the recent slowdown into an opportunity
by positioning itself as the ideal outsourcing destination. Clearly, the winners in this
competitive environment were those companies that were able to segment the market by
predetermined parameters like size, verticals and geography. Companies, who were able
to align their offerings according to the market demands and establish a brand with
attributes that were relevant to these segments, emerged successful. This has been
particularly true in the case SMEs (Small and Medium Enterprises). There are great
success stories to prove that despite the challenging market environment, niche SME
players with sound business models grew.

The SME sector will be a key ingredient for sustaining future growth of the Indian
software and services industry. However, SMEs will have to align their offerings
according to the demands of the industry to emerge successful in the long run.

Huge growth opportunities exist for Indian SMEs. To tap the potential that exists in the
domestic and export markets, SMEs in India would have to prepare themselves for the
following challenges:
 Tap the domestic market, as it will act as a test bed for innovation and new
service lines and help in rapid accumulation of higher value-added skills through
development of low cost, tailored solutions for domestic companies and the
government.
 Identify a defensible niche in nascent verticals such as healthcare, education,
transportation, utilities, e-governance, and technology areas like GIS,
embedded software or web services and product area.

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 Ensure a robust business continuity infrastructure and a global delivery network

and build a strong management team to build credibility and differentiation
through them
 Determine initial geography focus and identify critical initial steps
 Make clear, strategic choices to secure alliances with Systems Integrators and
build distinctive customer acquisition and retention skills

The challenge that the Indian software and services industry faces is that despite its rather
large size, the SME market continues to remain low-key in terms of revenues and global
reach. However, according to NASSCOM estimates, approximately 50-60 percent of
the industry revenues will be from SME segment by 2008. Currently this figure is
less than 10-15 per cent.
Source: NASSCOM

State Bank of India (SBI) : India’s Largest Bank :

State Bank of India (SBI) is the largest commercial bank in terms of profit, assets,
deposits, branches and employees in India, and the fourth largest when compared with
foreign banks working in India. The bank has been actively involved since 1973 in non-
profit activity called Community Service Banking. State Bank has also been awarded the
“TECHNOLOGY AWARD 2005” by the Banker, London. FORTUNE magazine has
included SBI in the list of Fortune 500 companies with SBI ranking 498. The issue is yet
to hit the newsstands.

Each branch of SBI takes care of businesses of very large corporations, medium
corporations, small business units, agriculture, government business and retail loans
including mortgages. It has a branch network of 9,000 and if the branches of its associate
banks are taken into considerations then the number of branches would increase to
14,000. State Bank has over 2 lakh employees on its payroll and including its associates

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it’s 3 lakhs. State Bank is keen on positioning itself as a global bank. It has been trying to
increase its global footprint through overseas acquisitions.

State Bank and its affiliates :

• Banking Subsidiaries: SBI has the following seven associate banks with
controlling interest ranging rates from 75% to 100%. State Bank of Bikaner and
Jaipur, State Bank of Hyderabad, State Bank of Indore, State Bank of Mysore,
State bank of Patiala, State Bank of Saurashtra and State Bank of Travancore.

• Foreign Subsidiaries: State bank of India International (Mauritius) Ltd, State Bank
of India (California), State bank of India (Canada).

• Non-Banking Subsidiaries: SBI Capital Market Ltd (SBICAP), SBI Funds

Management Pvt. Ltd, SBI Factor and Commercial Services Pvt. Ltd, SBI DFHI
(Discount and Finance house of India) Ltd.

• Joint Ventures: SBI Life Insurance Company Ltd (SBI LIFE).

The total revenue of State bank of India is Rs.41227.96 crores (Banking operations :
Rs.35265.88 and treasury operations : Rs.17436.77). The Total assets are Rs.493869.55
crores ( Domestic operations : Rs.450325.25 and Foreign operations – Rs.43546.30)

Products and services offered by SBI :

• Personal banking
• Agricultural/Rural banking
• NRI Services
• International banking
• Corporate banking
• Small and Medium Enterprises banking
• Government services and
• Other services

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State Bank of India has been playing a vital role in the development of small scale
industries. The bank has financed over 8 lakh SSI (Small Scale Industries) units in the
country; it has 55 specialized SSI branches, 99 branches in industrial estates and more
than 400 branches with SIB divisions. The Bank finances for Small Business activities
which are of special significance to a large number of people as many of these activities
can be started with relatively lower investment and with no special skills on the part of
the entrepreneurs. The following are the various products and services offered to Small
and Medium Enterprises:

PROJECT UPTECH :
SBI extends consultancy services through PROJECT UPTECH for technology up
gradation of small-scale industries. The bank's Consultancy Cells are trained for
comprehensive techno-managerial studies and the bank offers financial packages as
follow-up support for implementation of the up gradation ventures.

CHARTER FOR SSI:

Acknowledgements for receipt of loan application by branch by affixing date stamp.

• Time Norms for disposal of loan applications:

a. Upto Rs. 25,000  2 weeks
b. Over Rs. 25000 & upto Rs. 5 lakhs  4 weeks
c. Over Rs. 5 lakhs  8-9 weeks
• No collateral security for advances upto Rs. 5 lakhs.
• No collateral for advances over Rs. 5 lakhs and upto Rs. 15 lakhs based on good
track record and financial position.
• For loans sanctioned without collateral security /third party guarantee for
advances between Rs. 5 lakhs and Rs. 25 lakhs guarantee is available under Credit
Guarantee Scheme floated by CGTSI for SSI .For attention of guarantee, a
guarantee fee of 2.5 % of credit facility sanctioned for a period of 5 years (borne

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by bank) and Annual service fee @ 1% of outstanding amount as on 31st March

every year is payable.
• Composite loan upto Rs. 25 lakhs is sanctioned to SSI units.
• Loan quantum : Minimum 20% of projected annual sales turnover (Nayak
Committee Norms)
• Margin (Stake of borrowers) :
o Upto Rs. 25,000: Nil
o Between Rs. 25,000 and Rs. 5 Crores: 20%
o Over Rs. 5 crores: 25%
• Small Business Credit Card: Hassle free credit upto Rs. 5 lacs based on scoring
model and simplified application form.
• Simple loan application form as per Kapoor Committee recommendations
introduced.
• SME CREDIT PLUS' Additional limit @ 20 % of original limit, to meet the
unforeseen requirements of SSIs is sanctioned which can be availed 12 times in a
year.

SSI LOANS:
General purpose term loans:
SBI grants term loans to small scale industries for meeting general commercial purposes
like substitution of high cost debt, research and development, shoring up net worth and
funding business expansion. The tenor of the loan is normally is 3 years, and the pricing
is fine-tuned to suit the risk profile of the borrower. The repayment is structured in
monthly or quarterly installments, according to the cash generation cycle.

Liberalized credit for SSI:

SBI extends production linked credit facilities to small scale industries, ancillary
industrial units and village and cottage industrial units on liberal terms and conditions.
The pricing of the loan is based on the credit assessment, and the units with strong rating
may be given finer rates. No collateral security is required for loans up to Rs.5 lakhs.

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Composite term loans can be sanctioned up to Rs.25 lakhs combining term loan and
working capital.

Entrepreneurship scheme:
SBI grants financial assistance to technically qualified, trained and experienced
entrepreneurs for setting up new viable industrial projects

Equity fund scheme:

SBI grants financial assistance to entrepreneurs who are not able to meet their share of
equity fully, by way of interest free loans repayable over a long period. The Equity Fund
assistance can be normally repaid over 5 to 7 years after the moratorium period.

Stree Shakti Package: the Stree Shakti Package is aimed at supporting entrepreneurship
among women by providing certain concessions, such as the margin will be lowered by 5
% as applicable to separate categories, the interest rate will be lowered by 0.5 % in case
the loan exceeds Rs.2 lakhs. No security is required for loans up to Rs.5 lakhs in case of
tiny sector units.

BUSINESS ENTERPRISE:
Assistance is provided for firm who has established a business venture for the purpose of
providing any services whose cost does not exceed Rs.10 lakhs. Extent of assistance is
normally capped at Rs 10 lakhs out of which working capital limit sanctioned can be up
to Rs 5 lakhs

SME CREDIT PLUS:

The purpose and idea behind the product designed is to meet the unforeseen and sudden
expenditure of SME’s such as tax payments, repairs to machinery, for meeting bulk
orders and other contingencies. The nature of facility available is clean cash credit; each
amount withdrawn should be repaid within 2 months. There should be a gap of 15 days
between the last date of repayment of outstanding and for the next withdrawal.

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SMALL BUSINESS CREDIT CARD:

A hassle free, convenient and novel Small Business Credit Card Scheme launched for
easy credit delivery to SSI segments. Some of the attractive features are less paper work,
stock statement waived, submission of audited Balance Sheet waived, borrower to be
issued a small plastic card, half yearly inspection, simplified application, simplified
scoring model for appraisal, annual review based on the conduct of the account,
repayment of term loan component upto 5 years.
SBI also offers various other products and services for SME’s other than IT
SME’s such as assistance for Retail Trade, Professionals and self employed persons,
Doctor plus, Dental doctor plus, SBI Shoppe, Cyber plus, SME petro credit, Dal mill
plus, Paryatan plus, Transport operators, Auto clean, Eicher Motor Limited (EML), Auto
loan, Artisan credit card, Rice mill plus, School plus, Swarojgar credit card and Flexi
loan.

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PROBLEM FORMULATION

Need for the Study:

India has emerged as a major player in the field of Information Technology (IT) and the
size of the market is also increasing at a fast pace. Karnataka, being the hub of IT related
activities, contributes a major share. The state’s IT exports in 2005-06 stood at
whooping Rs. 4,00,810 million, up 36% from Rs. 2,93,680 million in the previous
fiscal, vis-à-vis the national average growth rate of 30%. As many as 201 software
units set up shop in the state during the period, with Bangalore playing host to 100 chip
design firms. The hardware exports which stood at Rs 24,810 million, up from Rs.
17,680 million registered a growth of over 40%. According to the findings of UBS-
Asia Business Monitor (UBS-ABM II) latest survey, Indian SMEs (Small and Medium
Enterprises) leaders consider the most important industry sectors to be IT&T (93
percent), building and construction (89 percent), and financing, utilities and energy (82
percent each). The survey also pointed out that 70 percent of Indian SMEs have said
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that their companies have credit and finance needs on an ongoing basis . This is the
highest percentage in the Asia-Pacific region. Also, according to NASSCOM estimates,
approximately 50-60 percent of the industry revenues will be from SME segment by
2008. Currently this figure is less than 10-15 per cent.

As the future growth story of India is going to be scripted in a big way by these SMEs,
and IT (Information Technology) is expected to be the most important industrial sector,
with the prevailing credit and finance needs of these SMEs a need was felt to undergo a
study to find the Banking requirements of SMEs in the IT industry in Bangalore, for
Bangalore is the hub of all the IT related activities. Also, the scope of the study entails the
ways in which State Bank of India (SBI) can tap this potential market by fulfilling the
requirements of these SMEs, with due consideration to ever growing competition in the
Banking sector.

Source: UBS-Asia Business Monitor (UBS-ABM II) survey 2006 and NASSCOM

Problem Definition :
“Banking Requirements of Small and Medium Enterprises (SMEs) in the IT
Industry in Bangalore, and the ways in which SBI can tap this market”

Research Objectives :
o To study the market potential of IT SMEs
o To find the different market segments in this IT SME market
o To study the main requirements of IT SMEs
o To study the FOREX requirements
o To study the requirements of other value added services
o To study the market perception of SBI, market being the SMEs
o To study the SME products & services offered or planned to be offered by
other banks with special focus on IT Industry
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o To study what performance factors in case of Banks are important for the
SMEs
o To do a comparative study of the Banks
o To recommend ways in which SBI can tap this market

List of Information Required :

o To find the demographic profile of IT SMEs
o To find their current sources of working capital financing
o To find the current sources of Long-term financing
o To find the market share of different banks in the different market
segments in the IT SME market
o To find the expected growth in the industry, SME sector and the individual
companies
o To find with which banks they are transacting at this moment and the
reasons for that
o To find what percentage of their total revenue comes from exports
o To find the biggest growth obstacles for IT SMEs
o To find how different banks are perceived on different performance
parameters/factors
o To find the importance level assigned to different performance factors
o To find the current products & services, way of functioning and the
different functional areas of SBI with special focus on SME
o To find the changes the market wants to see in the way SBI functions
o To find which other banks are also focusing on IT-SME market and the
products and services offered / proposed to be offered by them
o To find the acceptance level of SBI as a banker in the IT SME market.

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RESEARCH METHODOLOGY

Research Design :
1. Exploratory Research :- This form of research was used at two different
stages of the project :-
 Firstly, it was used in the problem formulation stage to get insight
into the whole business of SME banking, and also to get
information regarding the SMEs in the IT industry in Bangalore.
 Secondly, it was used while finding the products and services
offered to SMEs by banks apart from SBI. Websites of the banks
were studied.

2. Conclusive Research :-
 Descriptive research :-

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 Cross-sectional Research :-
 Survey Research :- After properly defining the
research problem, the type of research used was
conclusive to find out the possible solutions, by
getting the information required to achieve
research objectives. It was descriptive and not
experimental because of time and cost factors. It
was a cross-sectional one due to time constraint,
and survey research was used to add
effectiveness to it, but due to time and cost
constraints, sample survey was used in case of
SMEs while a few selected Banks were
surveyed to find answers to some very specific
research questions.

Sources of Data :
1. Secondary Sources :
a. Websites of : Reserve Bank of India, SIDBI, NASSCOM and
some commercial banks.
b. Some published articles related to SME banking, given by SBI
c. A book on “Marketing of SME products” published by State Bank
Staff College, Hyderabad.
2. Primary Sources :
a. IT SMEs of Bangalore
b. Some Commercial Banks in Bangalore

Instruments of Data Collection :

1. Personal Interview of Finance managers of IT SMEs : Using open as
well closed questions. A pilot survey was done to test the efficacy of the
questionnaire. The questionnaire is appended as Annexure-‘A’

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2. Personal Interview of managers looking after the SME banking of

their respective banks : The questionnaire is appended as Annexure-‘B’

Sampling Design :
a. Population Definition : The population for sampling is the list of all the
STPI (Software Technology Parks of India) members in the Karnataka IT
Directory 2005 designated as SME, with their office being in Bangalore City.
b. Sampling Technique :
 “Non-probability sampling through
Convenience Sampling”
 IT SMEs were called up to get appointments with their Finance
Managers. All those companies which gave access, form the
sample pool of the study irrespective of their locations. The
companies are from Jayanagar, J.P.Nagar, BTM Layout,
Koramangala, Elecronics City, Airport Road etc.
c. Sample Size : The sample size is 32
d. Apart from this a few selected banks were surveyed like SBI, Union Bank of
India, State Bank of Saurashtra, ICICI Bank and HSBC.

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ANALYSIS, FINDINGS &

INTERPRETATION

Demographic Profile of the IT SMEs :



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
All the companies surveyed were Private Limited Enterprises

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Findings from IT SMEs : (The method of analysis is in Annexure-‘C’)

5 to 10 crores
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9
The one company shown to be established before 1990 was listed as an SME in the
Karnataka IT Directory 2005, but when its Finance Manager was interviewed, he said
that its turnover stood above Rs.25 crores. It’s amazing to see that about 58% of the
companies started after 2000 have their turnover between Rs.5 to 10 crores while those
started between 1996 and 2000 have not been able to cross the Rs.5 crore mark. This may
be attributed to the dotcom crash of 2000. And, thereafter the companies coming up learnt
from other’s mistakes and did very well. Thus, the newest startups have performed the
best if turnover is considered to be a parameter. It will be interesting though to see which
8
type of companies came up during these periods See the following graph:

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6
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It is quite clear that mostly software companies came up, though BPOs are also in good
number. So, it can be interpreted that Software and BPO start-ups after 2000 have grown
very fast. They have been able to achieve what the companies started between 1991-95
9
have achieved, in just a span of about 4 to 5 years.


8

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Relati

7
Here also, considering the number of employees as a parameter for gauging growth, it can
be seen that the newest start-ups are at par with those started 10 to 14 years ago.
 Sources of Working Capital Financing

It is quite clear that of the total amount required to finance their working capital, a large
number of SMEs depend upon banks. To get more insight into it, let’s see the same thing 5
for each area of operation. For the sake of simplicity, wherever Retained Earnings were
used along with Banks or Parent Company, they have been clubbed together accordingly.

4P
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Op

It can be seen that although Banks are the only source of Working Capital Financing for
Hardware and BPO companies, for Software companies it’s their Parent Companies from
where they get their funds, though Banks also come into the picture with about 45%
software companies getting funds from banks. 1
 Sources of Long-term Financing

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It can be seen that for Long term source of finance, share of banks decrease as compared
to that of Working Capital while the share of Parent Companies increases.

So here again it can be seen that software companies cannot be said to be a very lucrative
market for Long-term loans. In fact, in case of long-term funds they depend more on their
parent companies. Also, following is the market share of the different banks in financing
both the Long-term and Working Capital requirements of these IT SMEs. 1

1
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It is quite evident that State Bank of India and State Bank of Mysore have a good holding
over the SME financing market. But do they have the firepower to sustain and better it?
That can be seen from the market perception of SBI, which will be discussed later.

 Banks taking care of the Salary Accounts of the Employees

So, in the stark contrast to the previous chart, SBI finds itself with only 6% of the IT
SMEs Salary A/C market. The leader is Citibank with 40% market share followed by a
distant second in ICICI Bank with about 20% market share. Also, one point to be noted
here is that Public Sector Banks led by SBI were ruling the roost in case of Working
Capital and Long-term Financing, but in case of Salary A/Cs, it’s the Private Banks led
by Citibank. The reasons for all this will be dealt with while comparing different banks
which will come later.

 Percentage of turnover coming from exports

Exports Below 25% of Turnover Above 75% of Turnover
No. Of
Companies 7 25

One important thing to remember is that, in total 20 companies out of 32 surveyed

(63%) said that export forms 100% of their turnover. The arithmetic average stood at
78.55%. This means that FOREX services can be a big market in case of IT SMEs.

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 Banks taking care of FOREX needs

Here again, it can be seen that Citibank is the market leader by a long way in terms of
FOREX market with SBI coming a far distant second with 16% market share. So, it is
clear that SBI is losing out in Salary A/C and FOREX markets.

 Year on Year Expectation of Growth Rates in the next 5 years

Year on Year IT Industry SME sector Company
Average (%) 52.79 47.55 58.68

As the respondents were more confident and comfortable in telling about the growth rates
of their own companies, the figures for IT Industry and SME sector be considered as their
perception only. The focus should be on the Company column. To analyze it further, take
a look at the following charts:

ABN
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Ex

It can be seen that although NASSCOM expects a YoY growth of 30% for the IT industry
as a whole (though it predicts SMEs to form 50-60% of the total industry by 2008, from
the current figure of 10-15%), SMEs expect very high growth for their companies in the
coming 5 years. Software companies have the highest expectations. Also, the figure is
above 50% for companies formed after 1995. One important thing is that if they grow as
per the expectations, then within 5 years they will be having annual turnover more than
Rs.40 crores, and bigger and expanding business means more business for banks

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associated with them. Also, the number of employees will increase with the growth which
can translate into more Salary A/Cs for the banks. Thus, one thing is very sure that it is a
very big market which is tapped sooner, the better.

 Obstacles in getting the Expected Growth Rates

Based upon the Pilot survey done, IT SMEs were given six choices to rank the biggest
obstacles they perceive in getting the expected growth rates. In the following chart, the
lesser is the score, the higher is the ranking.

It is quite clear that Poor Infrastructure, Lack of Skilled People, Problems in Marketing
and Scarcity of Funds are the biggest obstacles for these IT SMEs. There is a very slight
difference in the ranking points. It has to be pointed here though that the Hardware
companies had a lots of problem with the Marketing of their products. They needed help
in terms of Market Support Groups. Also, these hardware companies had lack of funds
for training of the new recruits. They also felt that they have become like Training

SME
Institutes for the bigger companies. Some similar points that IT SMEs raised were Lack
of Recognition in the Market and Lack of Resources to take up large Projects.
Infrastructure still remained the number one problem. “Lack of Funds” comes a very

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close fourth. IT SMEs didn’t feel that their SME status created any specific problems for
them.

 Requirements in Working Capital, CAPEX and FOREX

The companies didn’t reveal any specific areas under the above mentioned groups. They
were quite satisfied with what they were getting from the different sources. But, most had
infrastructure requirements while few had working capital requirements also in terms of
cash.

 Demands from the Commercial Banks

Based upon the pilot survey, the respondents were given three choices and were asked to
rank them. Also, they were asked to give any other demands that they had. Here is the
result.
Ranking Score
Interest rate 1 1.51
Customer Focus 2 1.61
Online Banking 3 1.82

There is hardly any significant difference among the three points above. Thus the three
top demands are viz. More Affordable Interest Rates, More Customer focused Behaviour
and Online Banking. Apart from these, some interesting demands raised are:
 Performance based Interest Rates
 Investments in IT SMEs should be considered as long term investments
 Banks should be partners in the business like a Venture Capitalist
 Promptness in Decision Making
 Same bank for Salary A/Cs; Transfer from Corporate A/Cs to Salary A/Cs

 Factors important while IT SMEs select their Bank, Market Perception of SBI
and its comparison with other banks
The sample size distribution in terms of with which Banks these IT SMEs have transacted
in whichever way is as follows:

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Let’s analyze the prevailing SBI customers first :

The factors that are important for prevailing IT SME customers of
SBI along with their evaluation of SBI on these factors are shown in the following tables :
Ranking Factors Important Points out of 2
1 Past Relationship with the Bank 1.71
1 Quickness of Decision Making 1.71
Time Taken in Settlement of
1 Transactions 1.71
2 Diversified Portfolio 1.57
3 Hassle-free Formalities 1.42
3 Transparency 1.42
Understanding of Problems of
3 Company 1.42
4 Friendliness of Personnel 1.28
5 Flexibility 1
5 Terms and Conditions 1
6 Customization of Products and Services 0.71
6 Location -- No. of Branches 0.71
7 Brand Image 0.57

Now just watch out for the ranking that these coloured factors get when evaluated for
SBI.

Ranking Factors Important Average score out of 10

1 Brand 7.42
2 Past Relationship 6.71
3 Flexibility 6.57
4 Transparency 5.42
5 Location 5

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Both SBI &

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5 Quickness 5
5 Terms 5
6 Diversified 4.71
6 Time Taken 4.71
7 Understanding 4.57
8 Friendliness 4.42
8 Hassle 4.42
9 Customization 3.42

It can be seen that SBI matches the importance assigned with Past Relationship only
while considering the first rank. On the performance parameters like Quickness of
Decision Making and Time taken in settlement of Transactions, it is not able to meet the
expectations. It meets the expectations in terms of Transparency a little bit but the score is
too less to be considered a good one. It scores very low in terms of important factors like
Diversified Portfolio of Products, Understanding and appreciation of the problems of the
company and Hassle-free formalities also. It is an irony though that it scores the highest
in the least important factor Brand Image. Also, the total average cumulative score it gets
is 79.42 out of a possible maximum of 260.
Analyzing customers of other banks only :
Ranking Factors Important Points out of 2
1 Hassle-free formalities 2
1 Quickness of Decision Making 2
1 Time Taken in Settlement of Transactions 2
2 Customization of Products & Services 1.77
2 Friendliness of Personnel 1.77
2 Past Relationship with the Bank 1.77
3 Transparency 1.55
3 Understanding of the problems of the Company 1.55
4 Terms and Conditions 1.33
5 Brand Image of the Bank 1.22
5 Diversified 1.22
5 Flexibility 1.22
6 Location 1

Ranking Factors Important Average Score out of 10

1 Location 8.6
2 Hassle 7.8
2 Time Taken 7.8
3 Past Relationship 7.6
4 Friendliness 7.4

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5 Brand 7.2
6 Quickness 7
7 Flexibility 6.6
7 Terms 6.6
8 Transparency 6.2
9 Understanding 5.2
10 Customization 4.8
11 Diversified 4.2

In case of customers of other banks only, it can be seen that they are doing quite well in
terms of meeting the expectations of their customers. The points that they have got is also
on higher side. They have Hassle-Free Formalities and take lesser time in settlement of
transactions. The personnel are friendly and they also value past relationship quite a lot.
But even they have to improve upon Quickness of Decision Making, Customization,
Transparency and Understanding of the problems of the company. The average
cumulative score they have got out of 260 is 131.2 out of which Private Banks score129.6
while Public Sector Banks (PSBs) score 133.5. It will be interesting now to see what
happens with customers who have transacted both with SBI and other Banks
Analyzing those transacting with both SBI and other Banks :
Ranking Factors Important Points out of 2
1 Understanding the problems of company 2
2 Time Taken 1.87
3 Quickness 1.72
4 Customization 1.56
4 Transparency 1.56
5 Friendliness 1.44
6 Past Relationship with the bank 1.31
6 Terms and Conditions 1.31
7 Diversified Portfolio 1.13
7 Location 1.13
8 Hassle-free formalities 1.12
9 Flexibility 1
10 Brand Image 0.6
It can be seen that Time taken and Quickness are consistently being given high rankings.
Now for analyzing it further, comparison has been made between SBI and Private banks,
and SBI and PSBs.

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Brand

Customisation

Past Relship
It can be seen that SBI is rated very low on the important factors when compared with

Location
Private Banks. It’s losing on Understanding, Time Taken and Quickness of Decision
Making in a big way while it has comparable scores for Terms & Conditions and

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Diversified
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Transparency. It betters Private banks only in terms of Brand Image. So, it’s clear which
areas SBI needs to improve upon. While comparing with other PSBs, it can be seen that
things are neck to neck, and therein the advantage SBI has got because of its Brand Image
can help it win over other PSBs competing for the IT SME market. Also, the average
cumulative scores for SBI, Private Banks and PSBs stood at 111, 155 and 95.2
respectively out of a maximum possible 260 for 13 factors being studied.
The Overall Importance assigned and overall comparison :
Ranking Factors Important Points out of 2
1 Time Taken in settlement of Transactions 1.86
2 Quickness of Decision Making 1.79
3 Understanding of the Problems of company 1.71
4 Customization of Products & Services 1.50
4 Past Relationship with the Bank 1.50
5 Transparency 1.43
5 Friendliness of Personnel 1.36
6 Diversified Portfolio of Products 1.29
6 Hassle-free formalities 1.29
7 Flexibility 1.21
8 Terms & Conditions 1.07
9 Location 0.93
10 Brand Image 0.56

Apart from all these factors some factors important for a few companies were Better
Communication from the Banks and Online Banking. Let’s have a look as to how SBI,
Private Banks and PSBs stand in overall comparison.

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So, it’s very important that SBI makes its delivery process and the whole approach more
customer focused and customer friendly. There is hardly any difference in the Terms and

Brand
Conditions being offered as perceived by the market. The deciding and the vital factors
are Time Taken in the Settlement of Transactions, Quickness of decision Making and
Understanding & Appreciation of the problems of the Company. The net average
cumulative score stood at 101.5, 142.3 and 106.1 for SBI, Private Banks and PSBs
respectively.

Customisation
 Suggestions to SBI from IT SMEs; Things that would make them to bank with
SBI.
Some of the suggestions received are as under :
 Faster clearance of Cheques

 Past Relship
Online Banking with FOREX
Salary A/C with all the facilities
 Customer approach like Multi-national Banks

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 Long-term orientation
 Flexibility
 Better customer relationship management
 Acceptance of SBI as a banker coming forward as a problem solver for IT SMEs
There is positive shift in the attitude if SBI improves its delivery. The only negative shift
is in case of prevailing customers where more than 50% customers said they Can’t Say,
while in all other cases respondents said that they would accept SBI as their banker.

Ac
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Findings from the Banks :

The banks that we could contact including SBI are State bank of Saurashtra, Union Bank
of India, HSBC and ICICI Bank. As the survey of Banks was done primarily to see what
competitors of SBI were doing and to benchmark against the best in the business, the
focus was on ICICI Bank and Citibank. Unfortunately, access to Citibank was denied, but
still it has been tried to get as much information as possible from its website. Also,
websites of some other banks that were not interviewed were studied. Here are first of all
the findings from the 5 banks surveyed :
 Do you focus on SMEs?
All the five banks said that they were focusing on SMEs

 Do you view IT SMEs as potential target markets?

All the five banks said in affirmative.

 Advances made to SMEs forms what percentage of the total advances made by
your bank?
Private Banks gave answers like Negligible and Not sure while the nationalized banks
had an average of 31.6%. It means that when it comes to lending as the main bankers,
nationalized banks are contributing more to the SMEs. This can be attributed to the social
commitment associated with them. Also, private banks are not that old in the Indian
market and may be that is why they don’t have a large percentage coming from SMEs.

 What percentage of the total SME lending is formed by advances made to IT

SMEs?
While HSBC said Nil, ICICI Bank said that 60% of their customers are from IT
industry and 40% is formed by call centres or BPOs. The average figure for the
nationalized banks is less than 5% and in fact close to 1-2% of their total SME
lending.

 Where do you want this percentage formed by IT SMEs to grow to after 5 years?

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The private banks didn’t respond to that while the average for nationalized banks is 11%.
That is growth of over 600% percent in a space of 5 years. That shows their inclination
towards this potential market.

 Expected growth rates of IT SMEs in the coming 5 years.

While nationalized banks expect them to grow at 5 to 7 % annually, HSBC expects
them to grow by 25% annually. ICICI Bank again didn’t respond.

 Important things that a bank looks for in an IT SME before lending.

ICICI Bank said they have a separate Risk Management Group which assesses the
credit worthiness of the prospective client, and the decision is taken on the basis of
their evaluation case by case. HSBC said they do not lend. The ranking for the
nationalized banks stood as:
Factors Ranking Score
Performance( Profit and Turnover) in the last 3 years 1 1
Infrastructure of the Company 2 2.66
Who’s the Promoter of the Company? 3 3
The purpose for which the loan is required 4 3.03
The type and the amount of Collateral Security 5 5

 Areas in which Products and services are being provided to IT SMEs.

ICICI Bank and HSBC said that they are into FOREX and Personal Banking for
Employees only. They said that they don’t provide any Working Capital and Long-
term loans to these IT SMEs. Nationalised banks said they provided everything, i.e. all
the four options provided. It can be interpreted that the private banks have done their
home work well before venturing into the market for they are dealing in only the areas
where potential really exists, i.e. FOREX and Salary A/Cs.

 What according to commercial banks are the top 3 requirements of IT SMEs?

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The responses of ICICI Bank and HSBC were: FOREX Remittances, Excellent
Customer Service, Personal Banking, Home loans for Employees and Corporate
credit cards. The responses from Nationalised banks were: Working Capital Loans,
Term Loans for Infrastructure, Remittances, Cash Management and Funds. From
the findings we had from IT SMEs, it is clear that Private Banks are more focused and
have a better understanding of the market as compared to the nationalized banks.

 What steps are you taking to fulfill these requirements?

Private Banks didn’t respond to it. Nationalised Banks said things like: Proper Appraisal,
Speedy Disposal, Improving technology and Training staff. It can be said that the banks
are aware of the areas where they need to improve upon to tap this market.

 All the banks are providing Online Banking facilities. But it is amazing that all
the IT SMEs were demanding for Online Banking facility from the commercial
banks. It might be because they are not even aware of the services provided by their
banks and only the banks can blame themselves for not highlighting it.

 What is the USP of your Bank?

ICICI Bank says it’s Anytime Anywhere Banking while HSBC says Customer
Service. The nationalized banks say, their Size, State Bank status, Social
Commitment etc. It is clearly evident that while Private Banks are focusing upon the
Performance parameters to showcase themselves, nationalized banks look a little out of
focus.

 The interest rates for most of the banks hovers around 10 to 11%.

 Most of the banks said that they simply needed the financial statements of the
companies.

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 What other services do you provide to these SMEs?

Services No. of Banks

providing that
service
Project Consultancy Services 3
Instant Clearing of Outstation Cheques 5
Cheque Bounce Protection Facility 3
Corporate Credit Cards 4
Other Advisory Services 2

So banks are missing on providing Consultancy and Advisory Services, which actually
these IT SMEs need for they are having problems with Marketing and Human Resources.

Findings from the Websites of Banks :

The focus was on Citibank, ICICI Bank and HSBC. Although ICICI Bank didn’t say
explicitly that they were focusing on SMEs but they have a separate SME Banking
section on their website and they are dealing with every possible requirement. It must be
said at this point of time though that SBI has very good SME products and services and
the terms and conditions are at par with the best of Private Banks. Also, IT SMEs had
rated SBI along with all the other Banks in the same level. The only stand out problem is
the delivery and customer focus.

HSBC, it seems has already done a study on SME Business Banking, as it can be found
out from it’s website. They know the obstacles faced by SMEs, and they are marketing
themselves as “We focus on your banking, so you focus on your business”. They have
separate facilities for small SMEs and large SMEs known as BusinessVantage and
Business Select respectively. They are providing things like Free Demand drafts, Free
Cheques payable at par, Free ATM card and Free Phone Banking and Internet
Banking. They have Dedicated Relationship Managers, Priority processing of
account related requests at their processing centre and Preferential rates and terms
on HSBC banking products for their SME customers. They also propose to provide
Factoring services for SMEs with 100% credit management and protection. Also,

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they talk of something called Open Account Sales which allows SMEs to increase their
sales. What it exactly means is not known but what one can take from this is that they are
designing ways in which SMEs can be helped in marketing and selling of their products.

Now the main bank which we have to focus upon is Citibank for it emerged as the market
leader among the banks taking care of FOREX needs of IT SMEs as well as market
leader among the banks taking care of Salary Accounts of Employees of IT SMEs.
Citibank offers Suvidha Account to the employees/salaried people, which benefits both
Employers as well as Employees. The benefits for Employers are:
 Online Salary Transfer
 Paperless Reimbursement
 Foreign Exchange Solutions
 Corporate Credit Cards
 Salary Alerts
 Free drafts at over 700 locations
Benefits to Employees:
 Anytime, Anywhere Savings Account
 Value added Debit Cards that offer discounts on shopping,
fuel, grocery and other purchases
 Free Investment and Insurance Advice
 Free Bill Payment on the net
 Relationship pricing on other products like Home Loans and
Personal Loans
In case of FOREX services, they are providing things like:
 Remittance across 100 countries
 Traveler’s Cheques
 Foreign Currency drafts issued in very less time
 Trade Remittances
In terms of Business Loans, Citibank is providing the following different types of loans:

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 Short-term unsecured business loan with preferential processing

and minimal documentation
 Annually renewable Overdraft facility for meeting working
capital requirements. Also, a transaction account as well as a
Relationship manager is assigned
 Term loan with a transaction account on which interest has to
be paid only on daily withdrawals. This makes the loan amount
keep reducing every month giving manageable repayment option to
the company
Thus, it can be seen that Citibank which can be considered as the benchmark organization
for being the market leader in two important market segments of FOREX and Salary
A/Cs, is very much customer focused and is providing facilities that suit an IT company.
This is why even bigger IT companies prefer to have Citibank as their banker for these
purposes.

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CONCLUSIONS / SALIENT FINDINGS

1. IT SMEs are growing in a very big way. Even NASSCOM expects them to
form 50 to 60% of the IT Industry by 2008 from the current figure of 10 to

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15%. Also, their own expectation of growth is approximately 58% year on

year, as found from the research. Considering that about 70% of IT SMEs have
turnover between 2 to 10 crores and 75% of them are less than 10 years old,
it can be predicted that they will grow into big companies in 5 years time. Also, it
means that their employee strength will increase which means more salary A/Cs
to take care of for the banks. As about 75% of revenue comes from Exports
for these IT SMEs, FOREX needs are also going to go up and a larger market for
the banks. Thus it can be concluded that IT SME is a big and fast growing
potential market.

2. There are different Banking Requirements for different market segments in

IT SMEs. For Software companies, their working capital and long-term finance
needs are met mostly by their parent companies. So, for such funding only those
Software companies should be picked which don’t have a big parent company.
Also, for the companies being funded from their parent companies, banks can
come in only by having some very attractive terms and conditions which lures
companies into taking debt in favour of equity. On the other hand, Hardware
companies depend totally on banks for all their needs. Their FOREX requirements
are lesser as they mostly have domestic market to cater to. Banks can come in to
provide Working Capital and long-term loans to these hardware companies. In
any case these companies expect to grow @ 40% per annum which is excellent
and with the fields like Mechatronics and Nanotechnology coming up, hardware
companies have very good growth prospects.

3. In terms of being the main lenders to IT SMEs, SBI has a good market share
of 33%. It is the joint market leader with State Bank of Mysore.

4. The market leader in the Salary A/C market is Citibank with 40% market
share followed by ICICI Bank at 22%. SBI has 6%.

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5. The market leader in FOREX IT SME market is Citibank with 45% market
share. SBI has 16%.

6. The top four requirements of IT SMEs are : Infrastructure, Skilled People,

Marketing needs and Funds in that order of ranking.

7. Top three demands of IT SMEs from commercial banks are : More

Affordable Interest Rates, Better Customer Focus and Online Banking.

8. The most important factors for IT SMEs while selecting a bank are : Time
Taken in Settlement of Transactions, Quickness of Decision Making,
Understanding and appreciation of the problems of the company,
Customization of Products and Past Relationship with the Bank.

9. SBI has an excellent Brand Name and Image but it loses heavily to the
Private Banks on the important performance parameters mentioned in the
previous point. It has to be noted though that Brand Image was rated as the
least important parameter.

10. Customer awareness about SBI is low. Many SMEs are not aware of the
FOREX products offered by it and that it has Online banking Facility.

11. Acceptance of SBI among these SMEs is around 66%. But the alarming thing
is that only 43% of its existing customers are willing to continue with it and
57% are not sure about it, which is a negative shift for SBI and thus it has to
take care of retaining its customers.

12. Almost all the banks are focusing on SMEs and view IT SMEs as potential
target market.

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13. Total advances made to IT SMEs is around 1 to 2% of SME lending which is

about 30% of the total lending.

14. Private Banks are already doing what this research has come out with. They
are already targeting only FOREX and Salary A/Cs of Software and BPO
SMEs.

15. Nationalised Banks including SBI are underestimating the growth potential
of IT SMEs for they expect an annual growth of 5 to 7% in them. Private
banks are more optimistic with HSBC expecting 25% growth per annum.
The reality though is that SMEs themselves expect an average figure of 58%
year on year.

16. Important factors for banks before lending to IT SMEs are : Performance in
the past three years, Infrastructure, The Promoter and Purpose of loan in
that order of ranking for Nationalised banks. Private banks depend upon the
recommendation of their Risk Management Group.

17. Private banks understand the requirements of IT SMEs better than

nationalized banks.

18. USPs of private banks are based on the performance parameters while those
of nationalized bank on their Size, Status and Social Commitment.

19. Banks are not providing enough advisory and Project Consultancy Services
while IT SMEs really need them.

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RECOMMENDATIONS

1. SBI should target Software and BPO SMEs for their Forex and Personal
banking of employees. They should target Hardware companies for Working

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capital and Long-term loans primarily but see this market segment in totality
and take care of their all the banking needs.
2. SBI should adopt a strategy of “Challenger” to Citibank in the FOREX and
Salary A/C markets. They should also first of all carefully study the products,
services and delivery model of Citibank.
3. Ways of fulfilling top requirements of IT SMEs :
a. Infrastructure : Infrastructure requirements are in terms of office
premises & space and computer& equipments. SBI can collaborate with
Builders and developers to design an easy repayment product called
Infrastructure loan. It can also collaborate with companies like IBM and
HCL Technologies to provide and computer peripherals. SBI should
provide instant loan for the same.
b. People : SBI can take care of funding the training expenses of IT SMEs.
Also, it can design a way of encouraging students availing Student
Education Loans from SBI to think of IT SMEs as a career option. This
way it will be satisfying the needs of both the clients and as a mediator it
can charge commission.
c. Marketing : Hardware companies are mostly focusing on the domestic
market and even NASSCOM has suggested them to get hold of domestic
market first. Now, SBI can act as an interface between these hardware
SMEs and its other clients who will be interested in those products. This
way these SMEs will get a way to showcase their products. SBI can also
provide Marketing/Selling Consultancy services in the form of Market
Support Groups. They can also use their website to showcase the products
on the lines of E-bay. For software companies, same thing can be done
through overseas branches of SBI.
d. Funds : SBI has interest rates which is less than most other banks if not
all. In terms of products and terms and conditions also it is quite good, but
it needs to improve upon the delivery quite a lot. Also, it can come out
with customized products for IT SMEs depending upon the market

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segment they are targeting. SBI can even think of Performance based
interest rates.

4. Before acting on all this though, to manage risk, SBI should pick companies
on the recommendations of its risk management group and credit rating by
SMERA ( SME Rating Agency of India). SBI can even look to pay the
nominal charges of getting SMEs credit rated. And once it decides that this
is the company to go for, it should take care of all the banking needs of the
company, like a business partner sharing the risk, i.e. it should act as a
venture capitalist with long-term investment plan and outlook.
5. SBI needs to improve quite a lot on its delivery process. It should train its
staff for being more customer focused and customer friendly. They must
show urgency in solving problems of the customers. SBI can have a separate
one point contacts in terms of Relationship Managers. Also, it can have a
dedicated webpage for faster action on problems of IT SMEs on a high
priority basis.
6. SBI should conduct a study on applying Lean Management Principles in its
operations and services. That study should come out with recommendations
as to how SBI can reduce its delivery or service time by doing away with
steps that are wasting time.
7. SBI should benchmark its Online Banking capabilities with banks like
Citibank as only Online banking is very important for IT SMEs.
8. SBI should create awareness about its technological upgradations, changing
attitude towards customers and should position itself more as “The Problem
Solver” on the performance parameters rather than the size and history of
the organization. It means it should couple its Brand name with
performance.
9. It can even think of applying Customer Relationship Management software
to focus in a better way on its customers. It can use its website for taking
feedbacks and suggestions from the existing customers.

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10. Private banks are providing Cheque Bounce Protection Facility which SBI is
not. To strengthen relationship, it should also provide this. Also, what it can
do is that they can have SMS alarming service to intimate the company that
they are running out of cash and they should hurry up to credit their account
before the bank closes for the day.
11. At last, SBI needs to bring a drastic change in attitude towards its
customers. It has shown its interest in doing so, now it needs to act quickly,
again time is the key.

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LIMITATIONS

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1. Due to non-access to many IT SMEs because they were very busy with their

auditing work, and also because of other company specific problems, the sample

size is 32 only.

2. Due to time and cost factors convenience sampling was used.

3. It was really difficult to get information from the banks through personal

interview for they feared that this was a study conducted as part of Summer

Project for a bank and company specific information will be revealed to their

competitors. That is why, information had to be collected from websites of many

banks.

4. Some of the areas couldn’t be explored for the time period was only 2 months.

Things like specific requirements were not revealed from the study.

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ANNEXURE

ANNEXURE-‘A’
QUESTIONNAIRE FOR SMEs

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1. Name of the Organisation : ………………………………………………………

(along with the location in Bangalore)

2. Year of Establishment : ……………………………

3. Type of Organisation :
 Sole Proprietorship  Partnership
 Private Limited  Public Limited

4. Area of Operation : ( Can tick √ more than one as per the case )
 Hardware  Software  BPO
 Any Other, Please Specify ……………………………………………

5. In the last financial year, what was your

a. Annual Turnover : ( in Rupees)
 Below 2 crores  02 to 05 crores
 05 – 10 crores  10 to 25 crores
 Above 25 crores

b. Total number of employees:

 Below 50  50 to 100
 100 to 500  Above 500

6. What are your current sources of working-capital financing? ( Can √ more than
one )
 Banks ( Please list few of them : …………………………………….)
 Retained Earnings
 Other Non-banking institutions
 Contribution from friends and relatives
 Others, please specify ………………………………………………..

7. What are your current sources of Long -term financing? ( Can √ more than one )
 Banks ( Please list few of them : …………………………………….)
 Retained Earnings
 Other Non-banking institutions
 Contribution from friends and relatives
 Others, please specify ………………………………………………..

8. With which banks do you keep the Salary Accounts of your employees?
…………………………………………………………………………………
Reasons : a) ………………………………………………………………….
b) ………………………………………………………………….

9. What percentage of your total turnover comes from Exports?

…………………………………………………………………………………

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10. Which bank is currently taking care of your FOREX needs?

………………………………………………………………………………….
11. What growth rates ( in % ) do you expect in the next 5 years in
a. IT Industry ………… b. SME Sector ………
c. Your company………

12. What according to you are some of the biggest obstacles in getting the expected
growth rates? (Rank them: 1 for the biggest problem and so on)
 Poor Infrastructure  Scarcity of Funds
 Lack of Skilled people  Problems in Marketing
 Your SME status  Govt. Rules and regulations
 Any Other ………………………………………………………………
 Any Other ………………………………………………………………

13. What specific problems are being faced by you because of the SME status?
a. ………………………………………………………………………………
b. ………………………………………………………………………………
c. ………………………………………………………………………………

14. What are your requirements in the following areas?

Areas Working Capital CAPEX FOREX

a)
b)
c)

15. How can commercial banks help you in operating efficiently and achieving your
targets? Your top 5 needs/demands !!
 More affordable interest rates  Online Banking
 More customer focused behaviour  Any Other………………
 Any Other…………………………………………………………………..

16. While selecting your bank, how important are the following factors for you? Give
a ‘√’ mark in the preferred box against each factor.
FACTORS V.Imp Imp Neither Not Not at
Imp nor Imp All
UnImp Imp
a) Terms and conditions
b) Hassle-free formalities
c) Friendliness of Personnel
d) Understanding and appreciation of
problems of the company
e) Flexibility
f) Transparency (In terms of costs

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involved)
g) Quickness of decision making
h) Time taken in the settlement of
transactions
i) Diversified portfolio of products
( One Bank All Solutions)
j) Location  No. of Branches
k) Past relationship with the bank
l) Customization of Products & Services
m) Brand Name of the Bank

 Any other factor that is very important for you :

a) ………………………………………………………………………..

b) ………………………………………………………………………..

17. Evaluate the banks on the factors mentioned below. (Assign marks out of 10, 1
being the lowest and 10 being the highest. )
Name of the Banks with which you are Your Your Your SBI
currently transacting  Bank 1 Bank 2 Bank 3

.............. ……….. …………. ………..

a) Terms and conditions
b) Hassle-free formalities
c) Friendliness of Personnel
d) Understanding and appreciation of
problems of the company
e) Flexibility
f) Transparency (In terms of costs
involved)
g) Quickness of decision making
h) Time taken in the settlement of
transactions
i) Diversified portfolio of products
( One Bank All Solutions)
j) Location  No. of Branches
k) Past relationship with the bank
l) Customization of Products & Services
n) Brand Name of the Bank
m) Other factors important for you
 …………………………………
 …………………………………

18. What would really make you to bank with SBI ? Suggestions to SBI !!

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a. ………………………………………………………………………………
b. ………………………………………………………………………………
c. ………………………………………………………………………………

19. If SBI comes forward as a solution provider to your problems, would you accept it
as your banker?
 Yes  No  Can’t Say

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ANNEXURE-‘B’
QUESTIONNAIRE FOR BANKS

1. Name of the Bank : ………………………………………………………………

2. Do you focus on SMEs?

 Yes  No
If Yes, go to Q.No.4

3. Are you planning to focus on SMEs in the near future?

 Yes  No  Can’t Say

4. Do you view IT SMEs as potential target market?

 Yes  No  Can’t Say

5. Advances made to the SMEs forms what percentage of the total advances made
by your bank?
………………………………………………………………………………………

6. Of the above figure, what percentage is formed by IT SMEs?

………………………………………………………………………………………

7. Where do you want this percentage formed by IT SMEs to grow to after 5 years?
………………………………………………………………………………………

8. What growth rate (in %) do you expect in the IT SMEs in the coming 5 years?
………………………………………………………………………………………

9. What are the things that you look for in an IT SME when approached for loans?
(Rank them: 1 for the most important thing and so on)
 Its Infrastructure
 Performance(Profit and Turnover) in the last 3 years
 Who’s the Promoter?
 The type and amount of collateral security it can give
 The purpose for which the loan is needed
 Any Other ……………………………………………………………….

10. Which are the areas in which you are providing products and services to IT
SMEs?
 Working Capital Loans  Long-term loans
 FOREX  Personal Banking for employees
 Any other………………………………………………………………

11. What according to you are the top 3 requirements/demands of these IT SMEs
from Commercial Banks?

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a. ........................................................................................................................
.
b. ………………………………………………………………………………
.
c. ………………………………………………………………………………
.
12. What steps are you taking to fulfill these requirements?
a. ………………………………………………………………………………
.
b. ………………………………………………………………………………
.
13. Do you provide online banking facilities?
 Yes  No

14. What according to you is the USP of your bank?

………………………………………………………………………………………
………………………………………………………………………………………
15. Please provide the prevailing interest rates in some of your successful SME
products:
Name of the Product Interest Rate
a) ……………………………………….. …………….
b) ……………………………………….. …………….
c) ………………………………………… …………….
d) ……………………………………….. ……………..

16. What are some of the necessary formalities required by the Bank when an SME
approaches for loans?
a. ………………………………………………………………………………
b. ………………………………………………………………………………
c. ………………………………………………………………………………
d. ………………………………………………………………………………
e. ………………………………………………………………………………

17. What are the rules governing the repayment of loans?

a. ………………………………………………………………………………
.
b. ………………………………………………………………………………
c. ………………………………………………………………………………

18. What other services do you provide to these SMEs?

 Project Consultancy Services
 Instant Clearing of Outstation Cheques
Cheque bounce protection facility
 Corporate credit cards
 Other advisory services ……………………………………………………..

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ANNEXURE-‘C’
Methodology used for Data Analysis
1. Question numbers 2,3,4 and 5 were meant to get the demographic profile of the IT
SMEs. The filled questionnaires were tabulated in terms of calculating the
frequencies for each category and thereby getting the corresponding pie chart
showing the percentage distribution.
2. Some questions were cross-tabulated with the required demographic categories to
get a clearer picture. For example, working capital sources of financing with Area
of Operation and The Year of Establishment.
3. Different market shares were calculated by simply getting the frequencies and
getting the corresponding pie chart.
4. Averages calculated are simple arithmetic averages.
5. For getting the rankings for Q.Nos. 12 and 15, the scores were calculated for each
option given by adding all the ranks given by different SMEs for that particular
option and getting the simple arithmetic average. After this the final scores were
sorted in an ascending order to get the final ranking.
6. For Q.No.16, different importance levels were given points ranging from -2 to +2
from Not at all Important to Very Important respectively. Now for getting the
cumulative score for each factor, frequencies with each importance level were
multiplied with their corresponding weights, i.e. +2 for V.Imp, +1 for Imp and so
on. Then all these weighted scores for each importance level were added to get the
final cumulative score for that particular factor. This score was then divided by
the sample size, i.e. 32 to get an average score which was then sorted in
descending order to get the ranking of the different factors considered while
selecting a bank.
7. Q.No.17 was analyzed by getting the scores out of 10 from the respondents and
then multiplying them with the weights of the importance level assigned to those
factors by that respondent. Only difference was that weights for Neither Important
Nor Unimportant, Not Important and Not at All important were all taken zero to
do away with any negative values that would have come up that way.

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8. The respondents were categorized as customers of SBI only, Other Public Sector
Banks and Private Banks so as to compare the three on the evaluation and
importance parameters. Also, that way only, acceptance level of SBI was found .

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BIBLIOGRAPHY

1. “Marketing of SME Products” published by State Bank Staff College,

Hyderabad

2. SBI internal report on FOREX in software industry and the role of Banks

3. Websites :

a. www.rbi.org.in

b. www.sidbi.com

c. www.statebankofindia.com

d. www.hsbc.co.in

e. www.online.citibank.co.in

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