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With small and medium enterprises (SMEs) making up over 99% of the country’s entrepreneurial establishments, it is hard to ignore their contribution to the domestic economy.
However, a long-standing complaint of SMEs has been that their access to financing is limited. This is mainly because financiers are wary of their track record due to a lack of verifiable documentation.
Enter the SME Credit Bureau (M) Sdn Bhd, which was established last June by the Credit Guarantee Corp Malaysia Bhd (CGC), which is a subsidiary of Bank Negara Malaysia.
SME Credit Bureau CEO Alex Lim says it aims to be a contact point for all financial institutions and SMEs to obtain credit information on SMEs.
He says studies have shown that with a proper place for SMEs to document their credit information, loan approval rates from financial institutions tend to be higher, which is beneficial for both the banks and SMEs.
“Right now, the bulk of information is obtained via the public domain such as the Internet and newspapers, which could lead to human error or mistakes in interpreting data,” he tells The Edge in a recent interview. “Now, with the bureau started, we have a single source of cooperation on data collection and verification.”
Currently, the bureau produces two types of reports for financial institutions — a business information report that has information on a company’s registry, similar to that produced by CCM, and a credit ratings report (CRR) that has information on a SME’s registry, its directors as well as information on its banking activities. Before this, the CRR was not available to banks and SMEs.
“We extract data directly from Bank Negara as well as from the Companies’ Commission of Malaysia and SMEs. Thus, the accuracy of the data is very high,” says Lim.
He says that although most banks rely on an internal credit ratings system, the CRR is nevertheless useful to them, particularly in view of information that can indicate the probability of delinquencies by SMEs, known as “D-checks”.
The main factor that determines the probability of delinquencies among SMEs, he says, is their payment behaviour over the past 12 months. Banks will be able to predict quite accurately the potential payment of an SME for the next 12 months.
The credit ratings report also shows the percentile ranking of the SMEs, which would enable banks to gauge how regularly a SME repays its loans compared with its peers, says Lim.
He adds that the credit rating methodology is created and used by Dun & Bradstreet, a business information solutions provider that specialises in solutions for credit bureaus globally. Its methodology has been employed for the past 20 years.
The bureau has fine-tuned the methodology to suit the domestic business environment and uses information on 200,000 SMEs over a five-year period.
Since banks would only need to obtain this information from a single source, loan applications from the SMEs would be processed faster. The bureau, however, does not provide comments in its credit ratings reports as its policy is to “help banks and SMEs make decisions, not make decisions for them,” Lim notes.
As for the SMEs, he says the credit bureau provides a platform for them to build their credibility and track record via a “self-enquiry report” so that they can compare their credit standing with that of their peers.
“We also have a client advisory team that has expertise in law and is trained to help SMEs recognise their strengths and weaknesses,” he says. The advisory services are free for members.
The credit bureau currently has 22,000 members but wants to encourage more SMEs to enlist as a means of promoting good payment behaviour among themselves, given that most of their clients are also SMEs themselves.
To obtain a report on a particular SME, a company will have to be a member of the bureau and contribute trade data to it, apart from having a commercial purpose for retrieving such information.
“This is to ensure that information on SMEs is protected from abuse. There are audit trails and system controls in place to monitor the data inflow and outflow from our systems,” says Lim.
Members will be required to disclose information about their compa-nies, and failure to do so will result in them being blacklisted or having to pay a penalty. “This will not bode well for a company that wants to dobusinesses with other SMEs or obtain loans from banks,” Lim says.
He says SMEs are also prevented from providing false information about their companies as the bureau has a team that performs data integrity checks to ensure that the information provided is credible.
Although the idea of setting up a credit bureau was mooted by CGC and Bank Negara, the bureau works closely with the Small and Medium Industries Development Council, or Smidec, as well as other relevant governmental agencies.
However, unlike state-run agencies, the credit bureau is self-financed via subscription fees and the sale of reports to banks and SMEs.
The bureau now has about 20 staff and functions like a data warehouse that is highly computerised. “But as business grows, we will expand our workforce,” Lim says.
The bureau is in discussions with the Association of Banks Malaysia and Dun & Bradstreet to become its shareholders, he adds. The bureau will be able to leverage on Dun & Bradstreet’s expertise, given that it also runs credit bureaus in other countries, including Singapore and Thailand.
Speeding up lending by banks is crucial to bolster the domestic economy, especially under the current slow economic conditions. In that respect, the SME Credit Bureau is a step in the right direction for both the corporate and banking sectors.
This article appeared in the Corporate page of The Edge Malaysia, Issue 756, May 25-31, 2009.
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