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 SME Financing difficulties
The financing of large firms relies on collaterals while the financing of SMEs should rely on
information
Collateral
High default risk Limited risk control methods(Bank
(Agency issues） loans used for high risk projects)

More stringent
Capital adequacy ratio for loans
regulations on
banks to SMEs
SMEs
Information
Difficulty in Pledging collateral goes beyond
collateral SMEs’ capabilities

Information Difficult to obtain information

asymmetry about SMEs

Databases and algorithms

 Credit risk database
Japanese experience: credit risk database contributes to SME financing across three
dimensions

Policy makers – important support for SME-related

policy making

Credit risk database Banks – credit scores are calculated for each SME and
provided to banks

Credit guarantee corporations – guarantee fee rate

scheme that takes credit risk into account
 Machine learning and SME credit risk
To improve SME credit risk management, machine learning algorithms are used to
accommodate non-financial data such as bank accounts’ transaction data.

Traditional methods Machine learning

Input Structured, standard, low frequency, Unstructured, complicated, high
and low dimensions frequency, and high dimensions
Output Low-frequency credit scores High-frequency credit scores
Purposes Loan screening and validation Loan screening and monitoring

Machine learning algorithms:

Results for random forest and XGBoost approaches outperform traditional methods
 Databases and algorithms
• Data quality for financial statements
1) Earnings management is a popular phenomena for public firms

2) Who monitor financial statement information for SMEs?

Tax authorities, banks, auditors, or other government agencies

3) Timeliness and transparency

 Databases and algorithms
• Alternative data:
In addition to bank transaction data, various alternative data can be used for estimating
credit scores. We can build the sector-based data infrastructure for SMEs with
concentrations on different sectors

1) Online sales data for online retailers

2) Electricity consumption data for manufacturing firms

3) Satellite data for farmers

4) Logistics data for general retailers

 Databases and algorithms
• Logistics data and firm performance:
Using large volume of data from a logistics corporation in China from 2010 to 2019, we
investigate whether and how the quarterly change in the net number of packages sent out
(in) by a public firm predicts the firm’s accounting performance, proxied by the changes in
sales and SG&A expenses.

We find that both the quarterly

changes in sales and SG&A expenses
are significantly positively
correlated to the quarterly change in
the number of packages
 Databases and algorithms
• Machine learning algorithms:
Big data provides credit models multiple dimensions to enhance the quality of estimation
through machine learning algorithms
 Input
•Financial Ratios  Output
•Text, Audio… •Credit Evaluation
•High-Frequency Data (Online •Default Risk
Business…) •……
•Social Network
•Customer’s Profile
•Customer’s Experience
•……

1) Interpretation of variables selected and used

2) Be aware of rare events such as sudden political and environmental shocks