Business Research vs Credit Risk Assessment- ‘Alternate data sources’
Discussions by eminent credit experts have highlighted the pure dependence of credit risk assessment on financial statements and payment history. Whereas good business research thrives on ‘Alternate data sources’ then why shouldn’t credit risk assessment incorporate alternate data for a robust model? Whether financial statements are more reliable is debatable point especially in the context of MSMEs (they form the bulk of business enterprises all over the globe). Most developed economies do not insist on audited statements from business owners and in developing economies, we are aware of what happens. The business owner decides what is to be presented….. Yes, payment history is credible and can be used as a source of information but can be misleading if relied solely upon. Credit rating does consider ‘alternate data sources’ but as a product is used for a minuscule segment of the universe. When you consider credit scoring or internal risk assessment processes, invariably ‘alternate data sources’ are disregarded. Moreover, majority of the credit officers are unaware of ‘alternate data sources’ and their relative weight in the risk assessment model. It seems that we all want to follow the system that has been established………….. Are we doing it right?
