Factors Affecting the Credit-Worthiness of Borrowers from MSME Sector

Abstract

The MSME sector is a major source of growth in developing and transition economies. Despite their economic significance, MSMEs face a number of bottlenecks that prevent them from achieving their full potential. A major obstacle in MSME development is its inability to access timely and adequate finance. On the other hand, in recent years, there has been a significant increase in the incidence of default from the MSME sector. Hence, there is need to restructure the credit rating models used by banks for this sector.This study examines the factors affecting the credit-worthiness of borrowers from the MSME sector. The study uses discriminant analysis to identify significant factors that can be used to differentiate between defaulters and non-defaulters from the factors included in the credit rating model. This can help banks to identify factors that need special attention to reduce the risk of default. The analysis also highlights factors that should be considered for existing borrowers during annual as well as quarterly credit risk analysis, in order to identify existing borrowers vulnerable to turn NPA in the future.