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SME Credit Bureau Information Presented By: Frank Lenisa Marketing Director, Compuscan
Presentation Overview1. Opportunity that SMEs provide2. Challenges in SME lending3. How SME credit bureaus can help overcome challenges4. Challenges faced by credit bureaus in SME data collection5. Some ideas to help credit bureaus
Opportunity That SMEs Provide Provides Marco benefits - Employment, Innovation, Contribution to GPD Presents a HUGE opportunity for lenders – relatively un severed market, makes for very profitable portfolio, with low NLPs SME Small Business Entrepreneur Sole Trader
Challenges in SME lending➤ Every lender must overcome two basic challenges to remain viable in SME lending:1. Managing the risks raised by asymmetric information ➤ Very acute in SME sector , even more so in developing economies ➤ Risk are; A. Adverse selection – how can lenders screen out high risk borrowers? B. Moral hazard – how can lenders protect loan repayments? ➤ All in the face of: Weak accounting standards Limited credit information Issues around physical collateral2. Keep costs low and revenues sufficiently high ➤ Cost management is especially challenging when average loan size is small, since transaction costs do not fall as loan size declines. ➤ Cost of origination can be higher than return
How to Overcome These Challenges?➤ Traditional approach, used in corporate lending cant work for SME loans Unlike commercial entities, the majority of SMEs are not required to file annual returns; thus traditional data for commercial lending (ratios on assets, liabilities, net worth, profitability) are not available➤ SME lending is similar to consumer/ individual lending – high volume, low ticket loans Majority of SME lending is small unsecured loans➤ In order to lend profitability to SMEs: lenders need to Treat each SME individually Based on a risk profile Ability to afford Vulnerability to market conditions Loan origination➤ Must manage SME relationship across credit life cycle Marketing Account / portfolio management Work out Collections
How to Overcome These Challenges?➤ With the high costs of SME loan origination; lenders need to consider automation to reduce origination costs With a large number of small borrowers, automation reduces operational costs and reduces strain on underwriters Time saved through automation can be redirected to increase sales and service➤ Automated decision process would accept the majority of applications without any requirement for manual underwriting➤ The software, analytics and data required to automate SME lending are similar to consumer lending➤ However, a more complex rules based approach is required, due to the complexity and diversity of SMEs➤ It is necessary to segment the SME accounts based on industry sector, size, value and strength of relationship
How SME Credit Bureaus Help?➤ Data / credit information is required for automation; it is not possible to automate without data: The data used come from two main sources: internal from the lenders database and from credit bureaus. Credit bureau data is required to execute certain decision rules Credit scoring models used in SME lending need data from the credit bureaus for the various variables in the model➤ Credit bureau data is cost effective and has been found to predict the failure of the SMEs beyond financial ratios and other predictive information Loan origination➤ Credit bureau information is used to prevent over indebtedness Account / portfolio Marketing management➤ Credit bureau information is used to measure risk and therefore can be used to price risk Work out Collections➤ Credit bureau information lowers the cost and time of loan origination➤ Credit bureau information must be used across the customers life cycle E.g.; used in account management, credit bureau data can indicate looming problems. Key events such a deteriorating credit score or irregular payments; should trigger a set of pre-collection actions.
What credit bureau data is required for SME lending? • Industry sector • Age of SME Business • Number of employees Demographics • Legal structure • Directors • SME identification information • Payment records of suppliers to SME Trade supplier • Aged current, 30, 60, 90, etc payment records • Payment information from multiple suppliers • Suppliers extend small amounts; can see credit deterioration early Principles of SME • Personal credit record on the principles of the SME • Credit performance of SME is strongly reflected by the past credit record performance of it principles Court record • Negative information from courts on SME • Judgment, liquidation information
What credit bureau data is required for SME lending? • Industry sector • Age of SME Business • Number of employees Most powerful and Demographics • Legal structure predictive • Directors • SME identification information • Payment records of suppliers to SME Trade supplier • Aged current, 30, 60, 90, etc payment records • Payment information from multiple suppliers • Personal credit record on the principles of the SME Principles of SME • Credit performance of SME is strongly reflected by record the past credit performance of it principles • Negative information from courts on SME Court record • Judgment, liquidation information
Challenges Faced by Credit Bureaus in SME Data Collection➤ Data on SMEs is often out of date and incomplete or not available, and there are not many central sources of data on SMEs SMEs are not required to report information, and they dont volunteer information Challenging to collect data on SMEs and is very resource intensive➤ The credit record on the principles is retrieved from the consumer credit bureau; if the country has one➤ The biggest challenge is collecting SME trade supplier payment records.
Trade Suppliers Payment Record➤ Suppliers are not required to send payment records to credit bureaus➤ In a few countries, the credit bureau law mandates banks (who are also suppliers to SMEs) to supply account and repayment data on SME to credit bureaus; however no law mandates the trade suppliers to provide data➤ Credit bureaus need to:1. Find the suppliers; supplier market is very diverse.2. Provide suppliers with an incentive to provide this data; very resource intensive for the credit bureau➤ To illustrate a case on just how challenging it is to collect payment information from suppliers, I will tell you about a project we did in South Africa.
Trade Suppliers Payment Record➤ The aim was to collect payment information from suppliers to building contractors. What was involved was: 1. Collecting demographic data on the SME’s active in building sector 2. Combining the data with the principal’s consumer credit record. 3. Collecting data from the SME’s on references, ability, and work completed. 4. Collection of purchase/payment transaction records from suppliers 5. Merge the data into credit records and make the credit record available to lenders and suppliers➤ The most challenging aspects were to collect payment information from the suppliers: Had to go visit a diverse range of suppliers to discuss project; took many man days Suppliers have issues and challenges in providing the data Suppliers software systems need to be enhanced to extract data; some not willing to spend resources Many SMEs did not have accounts and paid COD (COD payment record still predictive) with suppliers.
Trade Suppliers Payment Record➤ To overcome technological challenges ; we decided to implement a debt card SME to use card for all purchases at suppliers Arranged with acquiring bank to provide the purchase records Provided incentives at suppliers to encourage use of debt card➤ Only few cards taken up by SME SME were sceptical Not willing to participate Not understanding the purpose of project➤ Project currently on a go slow; further resources required.➤ We are working on more projects to collect payment information on SME, but we are focusing on oligopoly markets; where we don’t need to deal directly with the SME and where suppliers a few.➤ We are working with selected banks, so that we have lenders who will buy this SME data. It is no use collecting SME data, without lenders who will buy it. SME lending is still in it the early start-up stages, especially in developing markets.
Some Ideas to Help Credit Bureaus➤ Sensitise and create awareness amongst suppliers and SMEs with regard to sharing credit information. In order to encourage information flows to credit bureaus.➤ Extend the mandate of the registrar of companies to collect more demographic data on SMEs and to encourage the informal SMEs to register.➤ Extend the application of the credit bureau law to comply suppliers to provide payment information. Involve the Department of Trade and Industry.➤ Stakeholders could make available funding and collaborate with credit bureaus to do more projects in SME payment information collection.
Conclusion➤ SME lending need to be automated➤ Credit bureau data is required for automation➤ Most predictive information is 1. Principles credit history 2. Trade suppliers payment record➤ Very challenging for a credit bureaus to collect this information.➤ Requires the collaboration of all stakeholders, if we are to collect trade suppliers payment records effectively, efficiently and in sufficient volume from a diverse supplier market.