The Impact of Credit Scoring on SMEs
Small- and Medium-Scale Enterprises (or SMEs, in short) are often considered as an important source of economic growth and employment; mainly because of their ability to adapt to market changes and their capacity to grow. However, in many developing countries including the Philippines, these SMEs make up a large segment of registered businesses, but relatively a much smaller share of national GDP. In the Philippines, there are more than 800,000 micros, small, or medium sized entities, whose businesses span a number of industries, including manufacturing, wholesaling, retail trading and services.
Research work on SMEs has revealed that very few SMEs have been able to upgrade themselves to larger enterprises. One significant reason for this could be lack of access to financing and credit opportunities unlike those available to large companies/businesses. This dearth of financial resources prevents SMEs from making investments to improve their activities, make innovation in products/services, upgrade to new and better technologies, or expand their operations.
Commercial banks are often reluctant to extend loans to SMEs because of the higher cost involved in assessing their creditworthiness. They also perceive SME being too risky to do business with them. In that scenario, credit scoring has extensively been used to reduce the time and costs required to assess creditworthiness of loan applicants and process their applications; in order to make consumer and small enterprises lending profitable for commercial banks.
When used properly, credit scoring can be beneficial for all stakeholders, including borrowers, lenders and overall economy of a country. For borrowers, credit-scoring ensures an easier access to credit and lower borrowing costs. For lenders, it facilitates loan process through improved information, consistency and control. While at the same time, country’s economy grows with the growth of business entities.
Antoinette Schoar and Daniel Paravisini have conducted a research in Colombia on credit scoring models and have found that revealing credit scoring at the start of loan application increases the bank’s profitability because the review committee is able to make better quality decisions and reduces the time required to review the application. This results in quicker decisioning of credit applications and better access to credit by businesses.
Another study organized by the International Finance Corporation (IFC) showed that an average loan approving period for an SME was reduced from 9 days to just 3 days while average processing fee has reduced from $250 to $100 per application.
We at CreditBPO use financial technology tools to improve the operational efficiency, visibility and credit profile of SMEs in the Philippines. The CreditBPO Rating Report® can facilitate lending decisions within the context of reducing costs and improving service levels, while helping SME borrowers gain better access to credit.