Soft signal - Not out

I was watching one of the matches in the recently concluded incredible India-Australia series. For one of the appeals for a slip catch of an Indian batsman, the on-field umpire was not sure whether it was taken cleanly. He referred to the 3rd umpire. In parallel, the on-field umpire also sent a soft signal indicating that according to him, the batsman was not out.

TV replays remained inconclusive and the 3rd umpire asked the on-field umpire to stick to his decision. The Indian batsman indeed remained not out…

Now, the curious thing is that the on-field umpire didn’t have a hawk-eye vision. His judgement would have been based on a combination of (1) ball trajectory he saw with his naked eye, (2) observing instant and natural reactions from players closer to the ball: batsman, Australian wicketkeeper and slip fielders (Yes, Aussies can be sometimes honest too), but most importantly (3) his own experience.

This situation is common in cricket. To make things more curious, the 3rd umpire generally respects his colleague’s 5-second long assessment, when hard core data is insufficient.

This occurrence on a cricket field transported me back to my SME world. Even in today’s world where data is the new oil, lenders need to be street smart. We need to make a judgment by assessing hard signals arising out of data, and a few unwritten soft signals. COVID-19 made the pitch queerer, and prominence of soft signals grew.

I am sure you would have questions such as ‘Why are these soft signals so important in SME world?’ and ‘What was different during COVID-19?’

Let’s dig more.

SME world

Common knowledge tells us that larger the company, more complex and established are its governance, risk and compliance standards. Large firms have a long history of operations, many of them are listed with their financial and operational data available in public domain, and their supply chain is well established. This provides the quantitative structured data necessary to arrive at a credit decision.

SMEs are a bit different, and it would be unfair to assess them with a similar framework. SMEs are what mutual funds call ‘Emerging Bluechips’. If lenders only rely on rules, ratios, and robustness of data, they would not be able to serve the SME segment well. Hence a need for unconventional means. It has given rise to use of alternative data, a space wherein a lot of FinTechs have been operating for last few years.

COVID-19 was a tough period, especially for SMEs. However, it is the tough times that separate best from the rest. The world of alternative data is huge. Importantly, their interpretation is not purely black or white. Here I would like to talk about a few alternative data points – soft signals that assumed importance in the COVID-19 period.

Good, Bad and Ugly

 This all-time favorite movie is about how 3 different personalities behave differently in the same scenario. COVID-19 threw up challenging scenarios and SMEs’ responses differed.

Below are a few signals that mattered, and what was gathered from interactions with SMEs: 

We observed quite a few good, bad and ugly signals last year. For example, a promoter of one of the established consumer brands handed over the mantle to the inexperienced next generation. This nepotism hurt the firm, and eventually forced the promoter to sell off the business. On the other hand, we had a client in the domestic garments industry, badly hit by COVID-19. They were however very transparent in sharing the data with us on a regular basis. As a result, we took a pragmatic view of the situation and fully supported them. The firm has now emerged stronger from the crisis, thanks to its great conduct. 

Such signals are not thumb rules, and there could be many more which one may have experienced. Idea is to always supplement hard data we get from documents and other secondary sources with such soft signals, to arrive at a decision.

What’s next?

One clear direction that emerged in COVID-19 is intent gaining weight over ability. If SME’s (read promoter’s) intent was right and communication was smooth and proactive, stakeholders were ready to bat with them in tough times of last year. Things are likely to remain uncertain for some more time. The right intent and readiness to put blood and sweat in the game would be very critical for SMEs going forward. In fact, this is a period of learning for all of us, and I am very keen to hear your expectations from us, and how can we work with you better.

Banks and SMEs are from one team and currently batting at the crease under challenging conditions. Let’s display the right soft signals and remain not out.

Let’s build a long partnership together…

(The author is Head, Lending, SME banking, HSBC India)