Credit Risk Assessment of SMEs
Credit Risk Assessment of SMEs: Loan Criteria and Default Probability
Final Year Project - I
Aamir Aijaz Memon
10/12/2013
Table of Contents
1 INTRODUCTION
1.1 Background Study
Credit Rating is a very vast and emerging field of finance, it has opened up many new opportunities and challenges for financiers. Credit Agencies has adopted a almost standard set of rules to follow for individuals and big organizations, which has started resolving the default issues in these two categories; but whenever the matter of small and medium enterprises come into account, many of the conflicts take place, whether these should be treated as an individual, big organization or something else. This study is about resolving this issue.
1.1.1 Overview
This research is about the lending practices to the small medium enterprises, specially through financial institutions; as this is the only sources of financing to such types of companies. The equity market for small and medium enterprises is also not well developed in our country, and secondly to finance these types of companies through equity market would cost a lot to them, which would stop the development of this, one of the most important sectors of the economy.
This problem doesn 't only exist in Pakistan, but in most of the developed countries like Europe, China and many more are still encountering with the same type of problems regarding the small and medium enterprises. The Basel 's new accords are also has much more focus on the increasing problem of Credit Risk in the financial institutions, because this always remain one of the most important reason for most of the economy break down factor since Great Depression of 1929.
1.1.2 SMEs in Pakistan
The Government of Pakistan and State Bank of Pakistan keeps encouraging the financial institutions to finance the Small and Medium Enterprises, as these type of industries play very important role in the economy of the country. It is even much
Final Year Project - I
Aamir Aijaz Memon
10/12/2013
Table of Contents
1 INTRODUCTION
1.1 Background Study
Credit Rating is a very vast and emerging field of finance, it has opened up many new opportunities and challenges for financiers. Credit Agencies has adopted a almost standard set of rules to follow for individuals and big organizations, which has started resolving the default issues in these two categories; but whenever the matter of small and medium enterprises come into account, many of the conflicts take place, whether these should be treated as an individual, big organization or something else. This study is about resolving this issue.
1.1.1 Overview
This research is about the lending practices to the small medium enterprises, specially through financial institutions; as this is the only sources of financing to such types of companies. The equity market for small and medium enterprises is also not well developed in our country, and secondly to finance these types of companies through equity market would cost a lot to them, which would stop the development of this, one of the most important sectors of the economy.
This problem doesn 't only exist in Pakistan, but in most of the developed countries like Europe, China and many more are still encountering with the same type of problems regarding the small and medium enterprises. The Basel 's new accords are also has much more focus on the increasing problem of Credit Risk in the financial institutions, because this always remain one of the most important reason for most of the economy break down factor since Great Depression of 1929.
1.1.2 SMEs in Pakistan
The Government of Pakistan and State Bank of Pakistan keeps encouraging the financial institutions to finance the Small and Medium Enterprises, as these type of industries play very important role in the economy of the country. It is even much
Bibliography: Carey, M. & Treacy, W. F., 2000. Credit risk rating systems at large US banks. Journal of Banking & Finance 24, pp. 167-201. Chen, X., Wang, X. & Dash Wu b, D., 2010. Credit risk measurement and early warning of SMEs: An empirical study of listed SMEs in China, China: Elsevier B. V Decision Support Systems. Godbillon-Camus, B. & Godlewski, C. J., 2005. Credit Risk Management in Banks: Hard Information, Soft Information and Manipulation. Universit´e Robert Schuman, Strasbourg III, pp. 1-23. Kundid, A. & Ercegovac, R., 2011. Credit Rating in Financial Distress: Croatia SMes Finance Application, Croatia: Emerald Group Publishing Ltd. Matias Gama, A. P. & Amaral Geraldes, H. S., 2012. Credit risk assessment and the impact of the New Basel Capital Accord on small and medium-sized enterprises An empirical analysis, Portugal: Emerald Group Publishing Ltd. Thomas, L. C., 2000. A survey of credit and behavioural scoring: forecasting financial. International Journal of Forecasting 16, pp. 149-172. Y. Paul, S. & Boden, R., 2011. Size matters: the late payment, United Kingdom: Emerald Group Publishing Ltd.