Many lenders base their small and mid-size enterprise (SME) lending decisions on quantitative credit scoring methods and models. Quantitative credit scoring is an efficient means to evaluate borrower’s creditworthiness and to effectively price credit products. It provides accurate predictive metrics of a borrower’s future ability to meet debt obligations based on past experience.
In the micro-finance segment (SME-SMI) determining a credit score is difficult if not impossible. Lack of financial data due to limited business history, the inability to capture and articulate financial data or its non existence hinder transparency and make credit decisioning by lenders difficult.
In the absence of credit scoring metrics, lenders need to rely on qualitative methods to weigh credit risk and determine the creditworthiness of a micro-finance borrower.
Even with larger SME’s product markets and a company’s financial health can change direction seemingly overnight. Rapid changes in technology, capital market shifts and geopolitical and demographic risk factors are heightened and accelerated in today’s global economy. SME are impacted by these risk factors and commercial lenders should consider how well an SME is prepared to meet these mounting challenges. That is why bankers need to consider qualitative business risk factors in the credit decisioning process.
An effective qualitative risk assessment program targets six critical aspects of the SME-SMI enterprise. Those six business aspects are:
- Company’s Product and Market Dynamics
- A Risk Assessment of Business Functions
- Review of Critical Success Factors
- Optimized Business Plan
- Capital Allocation
- Realistic Projections
Managers and owners of SME-SMI enterprises must demonstrate to their banker how they have assessed these risks in their franchise. They must also articulate to lenders how their governance structure manages these risks and how their business plan will leverage capital to transform these risks into opportunities for growth and profitability.
Commercial lenders can feel safe in the assurance that owners and managers who can answer to these questions are the type of client the bank wants as customers.
Get Risk Aware: Qualitative Risk Assessment Apps
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