The SME Challenge

1. The SME Challenge May 10th 2005 (Pakistan)

2. Why SME Why Now Business Model Citigroup & SME Role of Government Conclusion Outline

3. Why SME? For The Banking System SME Represents A Large & Growing Opportunity Emerging Markets Banking Revenue Estimated At Over $40Billion For Policy Makers – It Is A Means To Achieve High Employment Employs Over 50% Of Labour Force Even In The Developed World High Economic Growth 50-60% Share of GDP – Engine Of Economic Growth Culture Of Entrepreneurship Wider Tax Base Alleviation Of Poverty

4. Why Now? Economic Liberalization (Last 15 Years) Declining Public Sector Role Privatization Of Power Sector, Oil & Gas, Telecommunications & Other Industries Emergence Of Private Enterprise As The Engine Of Growth Central & Eastern Europe, China, India, Pakistan Increasing Regional Economic Cooperation ECC/EU, NAFTA A “Freer” Trade Environment Reducing Trade Barriers (Tariffs) Privatization Of Banks Entrepreneurial & Performance Driven Management Increasing Product Sophistication & Better Risk Management Improving Cost Management & Operating Efficiency Banking Reforms Improvements In Legislation & Legal Infrastructure To Protect Rights Of The Lenders

5. What Is SME? Various Definitions Defined By Size Of Sales Or Number Of Employees Depends On Size Of Companies Relative To Economy EU Less Than 250 Employees & Sales Of Eur 50Million Or Balance Sheet Of Eur 43Million Citigroup $2-$50 Million In Sales [Up To$250MM In Some Countries] Differentiating Features Owner/Family Managed Proprietorships, Partnerships Or Small Private Or Public Limited Companies Generally Suppliers To Larger Local Or Multinational Companies Low Capitalization & Limited Financial Strength Needs A Mix Of Consumer & Corporate Banking Products

6. SME - A Hybrid? • Large & sophisticated relationship managed multi-product customers (need investment banking/corporate finance, derivatives and other high value added products along with traditional banking products). Corporate • Upper tiers need relatively wider product set similar to the larger corporate entities. • Lower tier, clients needs cut across boundaries of traditional consumer and corporate banking products. SME Micro

7. SME - Segment Needs

8. Business ModelThe Challenge Of Managing Scale & Diversity

9. Elements of the Business Model • A Full Service Relationship Bank • A Customer Relationship Organization • Not A Product Organization • Serving All Our Customer Needs • We Manage Our Credit Risk Through • Differentiated Processes Based On Size Of Exposure • Our Transaction Processing Aims To Lower Unit Cost Through • Use Of Technology • Specialization & Centralization Of Functions

10. The Business Model • Target Market Definition • Key To Long-Term Success • Should Be Able To Weather Economic Downturns • Business Drivers • Customer Acquisition & Attrition • Product Cross Sell • Low cost Funding Of Portfolio • Management Metrics • Expense Management • Low Cost Processing • Electronic Banking Platforms • Risk Management • Separation Of Customer Acquisition • & Management • Key To Managing Large Volumes & • Improving Returns Through Cross Sell • Differentiated Risk Process • Exposure Based • Low Cost Processing • Of Small Ticket & Large Volumes

11. Managing Scale - Credit Risk Management • Tailored Approach • Some Product Tailoring To Meet Specific Customer Needs. • Secured & Unsecured Cash Flow Based Lending • Obligor Risk Rating Models - To Differentiate Credit Risk Single Obligor Approach Large Exposures • Credit Program Approach • Broader Product Range (Trade, Generally Short Term loans, FX) • Mostly Secured Lending • Rating Or Scoring Models • Some exceptions allowed based on grading of customers Exposure Based Risk Architecture Medium Sized Exposure Credit Program Framework • Credit Factory Approach • Highly Standardized Approach • Standard Products (Trade, Generally Short Term loans, FX) • No Exceptions & Limited Product Range • Delinquency Managed • Scoring Small Exposure

12. Citigroup – Commercial Banking

13. Citigroup Commercial Business $66 Bn Assets $ Billion $56 Bn Assets Global but Selective Presence

14. Role Of Government As the EU sees it

15. Governments As Information Provider - Statistics in Focus Statistical Databases Default History Ownership Details Detailed Annual Financials Financial History Of All Registered Companies Number Of Employees Industry Available In Most Of CE Countries Poland, Hungary, Czech, Slovakia Largely Available In Turkey

16. Governments As Facilitators Help With Cheaper & Faster Start-Ups One Stop Shop Simplified Application Procedures Online Registration Of Businesses Access To Markets Domestic Reduced Requirements For Participation In Government Tenders Targets For SME Participation In Government Procurement Of Goods & Services International Information On International Opportunities Education On Key Success Factors In The International Market Help Participation In Trade Fares Education & Training Resources To Develop Entrepreneurs Adequate Supply Of Skilled Human Resources

17. Governments As Funding Support Providers Grants EU Grants Under Various Programs Availability Based On Screening Criteria & Priorities Subsidies To Financial Institutions SME Credit Risk Remains With The Banks European Investment Bank (EIB) Provides Subsidized Balance Sheet Funding To SME Banks EU Monetary Incentives To Banks – Up To Euro 5000 Per Deal Booked For Qualifying Transactions (Eur 40K To Eur 500K) Credit Support/Guarantees Partial Credit Risk Sharing - Up To 80% Of First Loss - Generally Through Portfolio Risk Insurance Insurance Cover For Receivables. Venture Capital Funds

18. Governments As Business Enablers Taxation Simplification & Reduction Of Tax Compliance Procedures Incentives To Encourage Earnings Retention & Balance Sheet Growth Flat tax ?

19. Conclusions

20. Some Take Aways For Lenders Strong Target Market Definition Key To Building A Balanced Portfolio & Reducing Credit Losses Separation Of Marketing, Sales For Managing Scale Focus On New Customer Acquisition Maintaining Existing Customers & X-Selling Management By Metrics Well Defined & Well Communicated Parameters Differentiated Credit Process An Efficient System Demands Differentiation In Credit Maintenance Process Based On Exposure/Risk Being Taken Low Cost Transaction Processing Small Ticket Size & Large Number Of Transactions Technology Based & Centralized Transactions Processing

21. And Points For The Government To Consider Bridge The Information Gap Help With Cheaper & Faster Start-Ups Help Increase Supply Of Financing For SME Facilitate Access To Markets Enhance Education & Training Resources