Association Between Financial Efficiency and Credit Risk of SMEs—A Study Using DEA and Altman Z-score

Abstract

Small and medium enterprises (SMEs) have encountered several threats resulting in a high failure rate vis-à-vis unavailability of financial assistance from funding institutions. Financial assistance is triggered through financial efficiency of SMEs and an error-free credit risk assessment. This article attempts to evaluate SMEs’ financial efficiency and credit risk. Data from 2016 to 2020 are collected for 36 listed companies and analysed using the Altman Z-score to predict leeway of bankruptcy and data envelopment analysis to study the financial efficiency. Association between results of both the models shows that there does not exist a direct relation between credit risk and financial efficiency. SMEs can build a comprehensive financial portfolio using the findings of this study The study findings indicated that it lowers the asymmetry of information and leads to deciding on proper interest rates to reduce borrowers’ substantiated credit risk, as this would result in ease of funding to financially distressed SMEs.