methods. By comparison, credit scoring models have already been broadly adopted in Argentina and Chile to evaluate smaller firms (Figure 5.12).

In the absence of credit scoring, interviewed banks have adopted credit assessment methods for SMEs that are usually a streamlined variant of the rating process used in corporate lending. Such methods tend to be more simplified than for corporate loans and adapted to reflect SME realities – for example, a greater weight placed on qualitative criteria in the rating itself. In Colombia, credit scoring models are expected to play a greater role in risk assessments as SME clients are better segmented/targeted, distinct financing products are designed based on their specific business needs, and historical data becomes available for model validation purposes.

Figure 5.12: Use of Scoring Models to Lend to SMEs <!-- Start of picture text --> Do not use scoring 63% 100%<br>models 38%<br>Only for small 0% 13%<br>loans 23%<br>Being developed 0% 25%<br>for small loans 8%<br>0%<br>Only for leasing 0%<br>8%<br>Argentina Chile Colombia<br><!-- End of picture text --> _Source: Authors’ analysis of bank questionnaires (simple averages across all banks) and World Bank (July 2007). Note: Figure 5.12 does not add up to 100 percent because some credit institutions in other countries did not provide a response._ SME clients are analyzed on a case-by-case basis using traditional rating techniques, and credit analysis is based on both quantitative and qualitative factors. Credit risk management is separated from sales and centralized at headquarters. In the absence of scoring models, credit ratings are generated on the basis of quantitative and qualitative information. Qualitative data is at least as important as quantitative data, particularly for smaller firms; in fact, as much as 60 percent of the rating for an SME comes from qualitative factors according to some of the interviewed risk managers. Qualitative information includes an evaluation of business plans, the quality of SME management, SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis of the SME, and an assessment of the prospects of the sector in which it operates. Most of this data is collected from information submitted by the SME client, and validated by on-site visits and references collected by bank staff. Quantitative assessments mostly derive from financial analysis and include variables such as cash flow generation, indebtedness, profitability and balance sheet structure. In some cases, these are complemented by analysis of the SME’s projected sector trends and of its owners’ financial standing. The latter factor is particularly important given the absence of reliable financial information and the family-owned nature of most SMEs. In fact, 50 percent of all interviewed banks state that information on the owner is as important as information on the firm, and both are included in the SME’s overall quantitative assessment. Banks collect most of this information either from internal sources and the client, or from credit bureau data.

Banks typically require collateral in order to lend to SMEs, and guarantees from firm owners and government programs play a significant role. Collateral (mostly real estate) is 34