Well Prepared for Better Credit

From the start of 2007 banks must adhere to the guidelines laid down in the Basel II framework when lending. This will oblige them to assess and determine the creditworthiness of their borrowers using a framework of ratings. This makes Basel II in effect a supervisory requirement on lenders (usually banks) to align themselves more strictly with commercial risk management principles. It all revolves around the systematic assessment of companies’ creditworthiness based on internal and/or external ratings. These are based on comprehensive analyses of both quantitative and qualitative information and are intended to minimize lending risk. A study by Haarmann Hemmelrath Management Consultants (HHMC) has found that modern rating methods used to assess a company’s business standing will focus increasingly on qualitative criteria in the future. The assessment also includes criteria such as business policy, management quality, products and product innovations, market-specific developments, processes involving customers and suppliers, and the company’s own payment patterns. The data captured in this process is therefore far more detailed than that contained in financial accounts or companies’ own key data.

Expanding awareness of Basel II

The HHMC study found that SMEs have already recognized the importance of qualitative criteria for lending. However opinions are divided as to SMEs’ understanding of Basel II’s concrete requirements. According to a survey conducted by WGZ Bank, less than half (49 percent) of the 1,700 or so SMEs surveyed in Rhineland and Westphalia claimed to possess detailed knowledge of Basel II. A further 43 percent consider that they have at least a basic understanding of Basel II, while only eight percent of SMEs are uninformed about Basel II. The study also found that knowledge of Basel II is more detailed the more staff a company has. Dr. Hans-Joachim Massenberg, Deputy General Manager of the Association of German Banks (BdB), is rather critical of the levels of understanding. “Unfortunately, we’re continuing to see that some SMEs, particularly the smaller ones, have not yet done enough work on their rating,” he complains. A study by Germany’s Postbank confirms this assessment. It found that almost 18 percent of businesses with revenues of less than Euro ten million have a poor or very poor understanding of Basel II.
Awareness of Basel II among Austrian SMEs is clearly also still limited, says a study carried out by the Institute for Empirical Social Research (IFES) on behalf of the Austrian National Bank. While 70 percent of respondents had heard of Basel II, 41 percent assumed that they would not be affected by the new guidelines. Just 16 percent had begun to make concrete preparations for the requirements of Basel II in areas such as controlling and transparency of accounting. Most Austrian-based SMEs seem to have a very relaxed attitude toward the new regulations.
“SMEs in Switzerland could also be making better and more consistent preparations for Basel II,” says Thomas Steinmann, CEO of Swiss SAP Business Partner ITS Atlantis. Since Swiss banks have for the past two or three years been practicing more restrictive lending policies based on company assessments, however, Steinmann believes that SMEs in Switzerland are sufficiently sensitized when it comes to Basel II.
Many German SMEs too seem to have recognized the requirements of Basel II. According to WGZ Bank, 33 percent have increased their own equity ratio, optimized planning and controlling instruments, or have already planned the appropriate measures. One quarter of the respondents (25 percent) want to have more active communication with the bank in the future. A similar number want to produce more meaningful data for future credit discussions than they produced in the past. 16 percent see introducing and improving internal quality management as a suitable opportunity to increase their creditworthiness.

Opportunity for SMEs

Experts agree that the new equity guidelines will tend to make loans more expensive (cf. Postbank study). However Basel II also represents an opportunity for SMEs. They will gain an acceptable, honest overall picture of their company. This will enable them to identify their weaknesses, undertake targeted measures for improvement and more clearly define and outline their strengths. This will lead to better ratings and eventually to more attractive, i.e. less expensive, lending conditions. It is therefore essential for SMEs to close any information gaps when it comes to ratings. The better informed that company management is about rating and lending processes when it applies for loans, the better it can support this process and exert a positive influence on the result. To achieve this, companies can perform both internal and external ratings. In the latter case, a rating agency performs the assessment instead of the company itself. SMEs who call in an agency should make sure it fits the needs of SMEs and can either produce appropriate references or is committed to codes of conduct, for example assuring continuous high quality of ratings or guaranteeing the protection of confidential data and information.

Measures regarded favorably by banks are an increase in equity ratio, liquidity planning and improvements in planning and controlling instruments. Other measures include alternative forms of financing, such as leasing, which are balance sheet-neutral. These protect companies’ equity positions and improve competitiveness – criteria that influence the rating under Basel II. Leasing models are especially interesting when it comes to e.g. capital goods with very short innovation cycles. This is particularly true of IT and communications products and solutions.

Lower interest on borrowings with cutting-edge software

When an SME invests in business software today it might already have become obsolete in a year’s time or, in the worst case, the vendor might have disappeared from the market. In our ever-changing modern knowledge- and communication-based society, SMEs too require state-of-the-art technologies. That is why SAP and its partners offer software tailored to the needs of SMEs such as SAP Business One and mySAP All-in-One solutions under favorable financing and leasing models. Apart from being kind on their pockets, this provides SMEs with sustainable, future-proof software solutions from SAP and its qualified partners that improve their competitiveness.
Modern IT systems are also a must from a security point of view. With Basel II coming into force, banks are also checking the precautions in place to minimize the risk (for example system stability, data backup) posed to IT systems in corporate environments. Banks punish firms with outdated, poorly maintained systems, or systems with a lack of security by applying higher rates of interest on borrowings. This can also prove costly in other areas. Firms that do not have at least comprehensive basic IT protection may be refused insurance, in which case they will not be covered in the event of data loss.

Further information:

General: www.bis.org (website of the Bank for International Settlements, BIS)
Studies: www.germanbanks.org, www.hhmc.de/index_de.html?lang=en
SAP AG: www.sap.com

Dr. Andreas Schaffry
Dr. Andreas Schaffry