Singapore SMEs’ Road to Recovery: Adopting Alternative SME Credit Scores to Improve Speed and Accuracy of Credit Underwriting for the Underbanked
The COVID-19 pandemic brought unprecedented challenges to the different sectors of society, including micro, small, and medium-sized enterprises (MSMEs). According to a Channel News Asia report, about 3,800 companies closed down in April 2020, and business cessation was expected to rise as the pandemic continued to strain the Singapore economy.
In Singapore, micro-SMEs play a vital role in the economy, making up 99 per cent of companies and employing 72 per cent of the workforce. Despite their contribution, a financing gap exists locally and in the region. INSEAD found that many established micro, small, and medium businesses in Southeast Asia lacked access to business loans, translating to a funding gap of US$300 billion.
Most traditional financial institutions consider MSMEs high-risk because they lack credit history and financial experience or backing. Moreover, since micro-SMEs don’t need to file financial reports, banks and other traditional financial institutions lack the means to assess these thin-file customers and effectively determine their default probability. As a result, some micro-SMEs lack the confidence to even seek credit.
MSMEs in economic recovery
Since the global financial crisis of 2008, lenders have been cautious about extending credit to those outside their low-risk borrowers. As such, many small businesses are left without a lifeline when disruptions, like the COVID-19 pandemic, strike.
With Singapore gearing up for economic recovery, micro-SMEs need to be financially included in order to look beyond survival mode and instead focus on scaling and taking advantage of new business opportunities.
At the same time, however, lenders must mitigate their risk, especially in uncertain times.
Banks and other financial institutions miss out on opportunities by failing to meet the needs of the micro-SME sector, notes McKinsey & Co. It adds that rethinking their SME-lending business to include the use of data and analytics, among others, can expand their market share and drive profitable growth.
Role of alternative credit data
How can we bridge the gap? This is where alternative data and credit scoring for the unbanked play a role.
Digital lending institutions, including some banks are making use of alternative credit data to adequately assess the unbanked and underbanked sectors and provide credit products suitable to them. In the case of micro-SMEs, digital banks can provide much-needed funding for those without credit.
By combining alternative data with other credit decisioning algorithms, digital banks can increase the accuracy of their credit assessment, thus enabling them to improve approval rates and offer better interest rates to borrowers. With the rise of digital financial services, more financing options have become available to micro-SMEs.
By using an alternative credit score for businesses in Singapore, for example, lenders can get a more comprehensive view of the financial condition of potential borrowers. Experian’s SME Network Score is one credit risk scorecard developed to address the issue of the lack of rating models for thin-file micro-SMEs.
How Experian can help
Experian’s SME Network Score predicts the likelihood of late or delayed payments to help businesses make better credit decisions, especially for thin-file companies like micro-SMEs.
In Singapore, the likelihood of delaying payments beyond 60 days past due is a good measure of one’s willingness and ability to pay. By combining traditional data and analytics with non-traditional data and machine learning methodologies, we are able to generate a reliable credit score.
As a result, businesses can lend more responsibly, fairly, and quickly. They can likewise reduce payment and collection efforts by offering customers the most appropriate credit, product, and payment tenure.
Clients can buy one-off reports indicating a business’ credit score. They can also opt to integrate SME Network Score through API so they can pull up reports on-demand based on a particular application.
Without a credit history, many micro-SMEs struggle to secure financing that will enable their businesses to grow and thrive. As such, a reliable alternative credit score that can allow lenders to assess their creditworthiness can help micro-SMEs become more financially included. At the same time, lenders can broaden their reach in this segment by exploring alternative means to measure a borrower’s ability to repay the loan.
Learn how Experian’s solutions can help you make better, faster, and fairer credit decisions. Explore the benefits of SME Network Score here.
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