In addition to the five financial ratios identified by the EBA for assessment of the riskiness/creditworthiness of SMEs by Banks (profitability, leverage, activity, liquidity and coverage), two other important elements used in the assessment are financial data and trade credit data on the SME collected by credit bureaus and business information providers.
Both of these data sources can be highly predictive of SMEs' creditworthiness and are widely used by lenders in their assessment of lending to SMEs. In practice the data is incorporated into credit or payment scores offered by the credit bureaus or business information providers. Such scores play a very important role in helping lenders in their assessment of SME riskiness, as often it is very difficult and costly for lenders to gain accurate risk insights on SME borrowers, because data such as financial ratios on liquidity, profitability and other aspects typically used for assessment of the riskiness of companies is simply not available for SMEs (especially the smaller companies).
The following data is typically incorporated in credit or payment scores, used by lenders in assessing SMEs' creditworthiness:
• Basic company information (name, legal form, address, number of employees, year of foundation, industry sector, etc.)
• Delinquency rate
• Mix of credit typologies
• Ratio of outstanding vs. granted debt
• Credit Mobility (the ratio of new versus closed credit lines)
• Percentage of the granted amount covered by collaterals
• Typology of collaterals
• Consumer information about SME stakeholders (e.g. directors, owners)
• Negative information such as insolvency proceedings, data of collecting agencies
• Information on existing accounts (e.g. at banks, telecommunication providers)
• Information on payment and liquidity of customers and business partners
• Trade credit information – payment behavior with suppliers
• Usage: the number, type, duration and scope of credit transactions with credit risk
• Length of credit history: possible indication of experience in dealing with financial obligations
• Macro-economic information (economic situation/seasonal influences/market situation in the industry, unemployment rate, interest rate environment, oil price, import prices, etc).
Credit and payment scores based on the above information serve as a highly predictive and cost-effective tool for assessment of SME riskiness. They are widely used in practice by lenders and enable them to accurately estimate the credit risk for their SME credit portfolios, and grant loans to SMEs which otherwise would not been available due to the lack of data on the traditional riskiness factors (profitability, leverage, activity, liquidity and coverage).
BIIA would like to thank the EBA for the opportunity to respond to this Discussion Paper and Call for Evidence.
We remain at your disposal, should you be interested in discussing our response in more detail. For any questions regarding our response please contact Joachim Bartells, Managing Director at : the secretariat of the association at: firstname.lastname@example.org.
Information on BIIA
BIIA is a non-profit trade association representing the business information industry. BIIA has global membership of 55 information companies of which 25 operate in the European Union. Our association actively cooperates with the other European information industry associations such as the Association of Consumer Credit Information Suppliers (ACCIS) and the Federation of European Business Information Services (FEBIS).