Analysis of credit ratings for small and medium-sized enterprises: Evidence from Asia

In Asia, small andmedium-sized enterprises (SMEs) account for the major share of employment and dominate domestic economies, yet providing these companies with access to finance is a challenge across the region. Asian economies are often characterized as having bank-dominated financial systems and underdeveloped capital markets, in particular with regard to venture capital. As a result, banks are the main source of financing for SMEs. It is crucial for banks to be able to distinguish healthy from risky companies. If they can do this, lending and financing SMEs through banks will be easier. In this paper, we explain the importance of SMEs in Asia. Then, we provide a scheme for assigning credit ratings to SMEs by employing two statistical analysis techniques—principal component analysis and cluster analysis—applying 11 financial ratios of 1,363 SMEs in Asia. If used by the financial institutions, this comprehensive and efficient method could enable banks and other lending agencies around the world, and especially in Asia, to group SME customers based on financial health and adjust interest rates on loans and set lending ceilings for each group.