In today’s age of cheap credit, getting loans from banks is easy – if you’re a big corporation. But for a long time, banks have been reluctant to lend to SMEs due to their comparatively high risk and small size.
However, banking consumer products have become highly competitive and margins from large corporate business have also dropped. Financial institutions have begun to embrace the SME banking sector en masse.
But SMEs are still finding access to bank financing difficult. One of the reasons why banks are still reluctant to lend to SMEs is a lack of track record. Normally, banks will wait until SMEs have hit the three-year anniversary mark before extending business loans to them.
With the advent of technology though, the gap for SME funding is narrowing. Information gleaned from real-time sources can help lenders identify reliable borrowers. Even for consumer banking, information from mobile operators can be used to analyse credit information for the unbanked, B40 population.
For a long time, credit reporting agencies have had access to various data points to analyse a borrower’s creditworthiness. In Malaysia, CTOS Data Systems Sdn Bhd looks at data like payment history, current debt level, turnover etc.
Using technology CTOS has devised a system called the CTOS SME Score tailored specifically to SMEs. The score is a three-digit representation of an SME’s credit risk, ranging from 100-400. As a composite score, it is comprised of CCRIS Company Credit Data and CCRIS Consumer Credit Data from Bank Negara Malaysia, filing data maintained at national registrars as well as financial data and ratio and business information and proprietary CTOS Data maintained by bureau partners.
This score allows lenders not only to flag high-risk customers in an existing portfolio, it can also be used to identify potential customers with a good payment history. It is not only banks that can use this score; alternative venues for funding like P2P lenders and private equity can also use the CTOS SME Score to better understand their customers.
In embracing new technology, CTOS enables SMEs to better gain access to finance. Decades ago, the creditworthiness of a business was determined by the hunch of a bank executive – who are often fallible and open to undue influence. Though impersonal, technology is impartial and the numbers tell a more complete story.