Small and Medium-Sized Enterprise (SME) Credit Risk Analysis Using Bank Lending Data: An Analysis of Thai SMEs

Small and medium-sized enterprises (SMEs) in Asia are frequently hailed as the backbone of the economies. However, the SMEs usually have severe difficulties with raising money. Considering the bank-dominated characteristic of economies in Asia, banks are the main source of financing, and the lack of a comprehensive credit rating database has been a bottleneck for SMEs. This paper examines how a credit rating scheme for SMEs can be developed, when access to other financial and non-financial ratios is not possible, by using data on lending by banks to SMEs. We employ statistical techniques on five variables from a sample of Thai SMEs and classify them into subgroups based on their financial health. By employing these techniques, banks could reduce information asymmetry and consequently set interest rates and lending ceilings for SMEs. This would ease financing to healthy SMEs and reduce the amount of nonperforming loans to this important sector.