Financial Ecosystem (Part 2)

Following up on our first article on how the bank uses your individual funds, we now turn to how banks organize themselves and how it impacts your corporate dealings with financial institutions.

Banks typically have various corporate segments to manage different tiers of companies in the economy. In order of revenue size of the company, it is usually business banking, commercial banking, and corporate banking. Depending on the bank, the tiers are split by revenue size of the company usually using S$10mil and S$100mil as typical thresholds used between departments.

If your company falls under S$10mil, you will be managed by the business banking team, up to $100MM, the commercial banking team, and above that, corporate banking. There are also product groups that support each tier like transaction banking, the markets team, and investment banking (for larger companies).

The lending policy also differs based on the risk appetite, so business banking loans are usually on a program lending basis where it is more restrictive, and collateral is required. At the upper end of the spectrum, banks are more willing to lend on an unsecured (or "clean") basis using cash flow as the main source of repayment.

Banks are very focused on return on capital for their corporate business and may use a risk-return calculator to determine if your company's business is worthwhile for them to pursue. The global banks are stricter on this so many companies may be asked to exit their relationships with the bank because of the inability to meet "return hurdles". Local banks tend to rely more on relationship lending so exits because of low returns are usually less common.

Global bank RMs are measured on the total return of the client relationship whilst local bank RMs are measured based on the amount of loans they bring in so different performance metrics lead to different approaches in the origination and maintenance of relationships. This is why many offer letters for loans now include a condition to route a certain amount of sales proceeds through the bank to ensure that the banks also earn fees from payments and float income from idle funds held in the company's bank accounts.

These are important revenue generators for the bank as they do not attract capital cost, unlike loans. There is also a risk management aspect as they can review the throughputs and set off funds in the account when there is a potential default. The T&Cs will always contain a "set-off" clause.

From a company's perspective, having a main bank to manage payments and Foreign Exchange usually leads to a deeper relationship with the bank rather than having peripheral relationships with many banks. For mid-market companies, it is useful to have between 3-5 banks to create competition but always understand which bank brings you value in different ways. For example, some banks may have more flexible lending policies and faster turn-around time, but some can help you expand regionally through their network.

Your CFO/FC should be able to assess this and decide which bank fits a specific purpose to advise the owners on which banks to use.

We hope that you found this article insightful and that there are naturally different nuances when engaging your banker. If you wish to understand more of the inner workings of the banks and how they can help you in your business, do reach out to us at [email protected] or [email protected]