Debt is one of the most essential aspects of running a business. In fact, borrowing money is considered an essential part of growing a business. Many companies that recognize this offer financial products to grow alongside small and medium businesses. However, with increasing default rates and digital fraud attempts, how should a finance company assess its risk when lending to SMEs in the Philippines? How to bridge the gap between the recognition of a client’s commercial potential and the identification of the risks of lending to him in order to establish a synergistic partnership?
In 2019, the Philippine Statistics Authority listed more than one million business enterprises active in the country. According to 2020 research from TransUnion, digital fraud targeting financial services is increasing rapidly. As more companies are established, finance institutions must evolve with them to stay relevant and keep up with industry trends and innovations. Risk analysts need to be able to track changes in their environment, especially those attributed to external factors like the pandemic or digital fraudsters. Establishing the right risk for each client is the soundest foundation you can have for a partnership. When you contextualize and tailor your solutions to your customers, you are able to capture the whole image of your customer’s business. Rather than being conservative in lending, you are able to see the risks associated with your decisions and make the most risk aware decisions.
Lending always comes with risk. One of the best practices in the industry when it comes to risk profiling when lending to SMEs is to know your client or KYC. It literally means verifying its identity and suitability for your product. Please note that this is not just about reviewing the information or documents presented, it is also about understanding that a compliant business does not necessarily mean that it is solvent. A business may have all of its documents sorted but have a history of defaulting vendors, making it too risky to lend. Knowing your client means identifying those details before you lend to them. But how do you lend to good small businesses that aren’t always compliant? How do we provide considerations when making a loan?
In the Filipino context, starting a business and keeping it in compliance involves a complex web of bureaucracy. Business owners need to move from one location to another just to meet regulatory requirements. As such, companies must be smart to allow considerations that may be beyond the control of their customers’ businesses. The key to growing with clients is to stay relevant in an ever-changing environment. Also, being open to the idea that a credible company is not always what it appears to be in its documents.
You can’t expect to capture the size of an SME’s business just from documents. Like any other business, they are looking for ways to maximize their profits. In fact, it is common to have underestimated financial data. Failure to recognize this and being too strict can cause you to miss out on opportunities for partnering. So, when creating your client’s profile, it’s important to do your own research and not just rely on what’s in front of you. The job is to balance and recognize both the objective and the subjective. You cannot compel a client to submit updated business registration documents when you know full well that it will take weeks for them to be processed and published by the issuing government office. Along the same lines, you cannot expect physical copies of documents to be submitted during a pandemic. This should not be confused with regulatory compliance with external regulators. Rather, the art of balancing compliance and risk with the promise of positive return is the key to recognizing a business’s potential.
A tailor-made risk assessment for tailor-made solutions is the key to a synergistic partnership. This, in turn, leads to a healthy relationship: a relationship that both parties can benefit from. This is precisely what makes a finance institution, which can clearly identify with whom it wants to partner, to stand out in this growing industry.
Wiona Reyes is a Risk Operations Analyst at First Circle, involved in onboarding and sending loans to clients for funding. She specializes in KYC underwriting and compliance. She graduated from Ateneo de Manila University with a BA in Legal Management. Besides converting accounts, she is also involved in process improvement and project initiatives. You can contact her via LinkedIn: https://www.linkedin.com/in/wiona-reyes-79572a18a/.