Analytical framework on credit risks for financing small and medium-sized enterprises in Asia

Small and medium-sized enterprises (SMEs) account for the major share of employment and dominate the Asian economies. These economies are often characterized as having bank-dominated financial systems and underdeveloped capital markets, in particular venture capital. Hence, offering new methods for financing SMEs is crucial. Hometown investment trust funds are a form of financial intermediation that was started recently and has since been adopted as a national strategy in Japan. In the present paper, the authors explain the importance of SMEs in Asia and describe hometown investment trust funds. They then provide a scheme for credit rating of SMEs, employing two statistical analysis techniques, principal component analysis and cluster analysis to analyse the credit risks of a sample of Asian SMEs by using their financial variables. This comprehensive and efficient method would enable banks, to group their SME customers based on their financial health, adjust interest rates on loans and set lending ceilings for each group. Moreover, this method is applicable to hometown investment trust funds around the world.