S&P and RDB launch SME CreditModel in Japan

Standard and Poor’s (S&P) Risk Solutions and the Risk Data Bank of Japan (RDB), a credit risk data provider, have launched a new advanced default probability model that assesses the creditworthiness of small and medium-sized (SME) Japanese enterprises.

Called Chusho Kigyo (SME) CreditModel, the system is a risk management tool that estimates the likelihood of credit default by companies with sales of less than ¥10 billion ($8.42 million). It enables lenders and portfolio managers to evaluate whether prospective SME borrowers meet credit standards, determines optimal pricing for SME lending, and estimates capital allocation levels.

"The launch of Chusho Kigyo (SME) CreditModel is particularly relevant to Japanese banks because they are being increasingly challenged to improve the performance of their loan portfolios and make more strategic lending decisions," said Yoshiyuki Mitsugi, managing director of S&P Risk Solutions Japan. "Chusho Kigyo (SME) CreditModel can help them in the difficult balancing act of downsizing their balance sheets and better meeting capital adequacy requirements, while also continuing to lend and provide liquidity to SME borrowers."Mitsugi added that Chusho Kigyo (SME) CreditModel can play a significant role in facilitating better risk management and in helping Japanese banks to address the requirements proposed in the Basel II Accord.

The system was built using RDB’s proprietary database, which aggregates financial and company data from 41 financial institutions. Data inputs include 1 million financial statements on SMEs, 220,000 default samples, and covers real estate, manufacturing, wholesaling, construction, retail and food sectors.

"SMEs constitute more than 60% of the corporate loans of Japanese banks’ lending portfolios," said Yutaka Ohkubo, president of RDB. "They will be able to continue to obtain financing and remain a healthy part of the Japanese economy if bankers have a tool that provides a more efficient, precise and confident lending decision than they currently have."

S&P’s structured finance ratings group will use the system to analyse securitisation transactions, particularly collateralised debt obligations.