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ASEAN credit rating could help small businesses
MSMEs contribute from 30 percent to 60 percent to the GDP in ASEAN. But they receive only a small portion of bank financing, at around 20 percent of total ASEAN bank loans.
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Do not disturb: A worker rolls thread in a process that requires intense focus in Kediri, East Java. (JP/Nedi Putra AW)
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he definition of micro, small and medium enterprises (MSMEs) varies across ASEAN countries. Indonesia and Malaysia define MSMEs as companies that have more than five but less than 75 employees, while the Philippines, Thailand and Singapore define MSMEs as firms with no more 200 employees. In term of annual sales, MSME borrowers are firms with less than US$4 million in annual sales in Indonesia, $6 million in Malaysia, $2.3 million in the Philippines, $6 million in Thailand and $74 million in Singapore.
ASEAN is a diverse and economically dynamic grouping of 10 Asian countries that collectively accounts for the world’s third largest consumer base and a 3.2 percent share of the global gross domestic product (over $2.5 trillion) and an average gross domestic product (GDP) per capita over $4,000. MSMEs amount to 97 percent of business units in ASEAN, and most of its labor force.
MSMEs contribute from 30 percent to 60 percent to the GDP in ASEAN. But despite being the backbone of ASEAN’s economy they receive only a small portion of bank financing, with total MSMEs loans at just around 20 percent of total ASEAN bank loans.
Most banks are unwilling and hesitant to provide credit to MSMEs, mainly citing the issue of asymmetric information. Data on non-performing loans (NPLs) suggests that the NPLs of these enterprises constitute a large portion of the gross NPL in each economy. Consequently, banks need supporting information about the creditworthiness of MSME borrowers to help them better understand their risk profile, to improve the credit target, to speed up the credit disbursement process and to expand credit services for MSMEs. Credit ratings/scorings can provide such information.
However, some banks face challenges in adopting MSME credit ratings, as MSMEs possess unique characteristics compared to large companies. These include: low capitalization, limited recognizable assets, short business lifespan, the lack of external or well-trusted ratings, poor access to capital markets, very large cash-based transactions, lack of financial and operational transparency, absence of credit history and poor financial disclosure, as well as the absence of reliable audited financial statements and a high credit risk perception with high borrowing costs.
The dual nature of MSME lending makes it possible to assess credit risk using approaches from both the corporate and retail lending sectors. The corporate world relies mainly on structural market-based models for credit risk measurement, while retail lenders use empirical predictive models (credit scoring). To explore MSMEs as retail or corporate credit exposures is justified, depending on the capability of a bank’s internal risk rating system to adequately capture the differences between the characteristics of loans and various types of assets, and the methods used to calculate the relevant risk measure.
There are varying conditions among ASEAN countries regarding the financial infrastructure to support MSMEs. Only two countries, Singapore and Malaysia, already have a complete infrastructure to support SME credit ratings.
