Credit Scoring: Tool for More Efficient SME Lending

Exploring the lessons learned from the US experience with SME credit scoring, the paper states that credit scoring:

• Increases the consistency, speed, and often the accuracy of credit evaluations while it lowers costs of gathering relevant information;
• Removes human bias from the lending decision, which eliminates variation in the way risks are assessed among loan officers over time;
• Means loan decisions can be rendered in minutes or hours rather than in days and weeks because credit-scoring procedures are automated.

The paper also looks at how to develop a scoring model and the requirements for SME scoring. The paper looks into the future use of credit scoring and says that one of the most promising future applications involves the securitisation of pools of loans (collateralised loan obligations). Concludes that credit scoring has:

• Made SME lending more efficient, profitable and competitive;
• Helped banks target prospects through direct mail and other techniques;
• Models built for account management can reduce the costs of monitoring and servicing loans, by eliminating annual renewals on low-risk customers, prioritizing collections queues, and repricing/cross selling profitable accounts.

The paper warns that in a typical financial institution, neither scoring nor automated underwriting completely replaces manual underwriting while use of these techniques can reduce manual reviews by around 50-80%.