Technology may deliver better returns than regulatory incentives in the drive to stimulate lending to small and medium-sized enterprises.

From the International Monetary Fund and World Bank annual meetings in Washington, DC, in October to the G20 meeting in Brisbane, Australia one month later, boosting growth has been the catchphrase. The G20 has pledged to raise global economic growth by two percentage points, and believes it has found measures to achieve 1.8 percentage points of that already.

The missing link preoccupying policy-makers is small and medium enterprises (SMEs). They are important as the backbone of employment provision, so their growth provides a different and politically important dynamic. For SMEs to flourish, they need working capital. And so the focus has turned to stepping up the availability of credit for SMEs. Two potential responses come to mind: policy incentives and innovation.

When in doubt, the EU tends to opt for new rules and regulations. The final drafts of the European Commission’s delegated acts on the liquidity coverage ratio for banks and solvency rules for insurers both embraced the idea of favourable policy treatment for 'high-quality' securitisations of SME loans. But such incentives will only work if banks are confident they can put the extra balance sheet to work at a price that makes sense.

This is where innovation comes in. SME managers may not be experts when it comes to compiling accounts, and the due diligence required is potentially more intensive than for a large company, for a fraction of the balance sheet deployment. In emerging markets, banks can put most of their books to work purely lending to the government and large state-backed companies. In developed markets, mass-produced retail loans are more cost efficient.

In The Banker's previous edition, James King examined how new technology is already revolutionising credit scoring for retail customers and reaching the underbanked. The next frontier is adapting that approach to SMEs. China’s e-commerce giant, Alibaba, claims to have about 1000 data points on every SME that uses its platform – far more than any bank’s credit officer would obtain. More forward-thinking banks are starting to offer their SME clients subsidised access to automated accounting and valuation apps, such as BizEquity, reducing the bankers’ own due diligence and credit risk costs in the process. And tools that scrape non-linear information, such as customer opinions of a company from social media, or monitor the company’s e-commerce volumes, can all enable potential lenders to build a remote profile of an SME without needing the high-cost branch networks of the past.

Good news for SMEs, but mixed news for banks. Unlike easing prudential regulations, technology can favour nimbler alternative lenders, such as peer-to-peer platforms, rather than the banks.

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