Building SME rating. A comparison between accounting and non accounting model in the Italian market

Assessing and pricing SME credit risk correctly is essential for both, financial institutions in order to ensure that the profitability of their commercial clients falls within the desired risk appetite and SMEs in order to guarantee their access to banking funds. Enhancing credit risk models specific for SMEs is a leading success factor for banks that are interested to target this profitable market. The main goal of this paper is to analyze the role that credit relationship variables can play in assessing SMEs creditworthiness and compare their value in predicting business failure with the one of the most commonly used financial ratios. One motivation of our study is to show the significant importance for banks of modeling credit risk for SMEs relaying more on variables that describe the account relationship that the company has with the bank than on its balance sheet figures. Our findings demonstrate that account relationship variables are better predictor of corporate failure than financial ratios improving the prediction accuracy of the models of about 20%.