Journal of Applied Finance & Banking

Credit risk evaluation and rating for SMES using statistical approaches: the case of European SMES manufacturing sector

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  • Abstract

     

    The prevention of financial losses is crucial for enterprises, especially in periods of market instability and uncertainty. Credit risk refers to the likelihood that a company will not be able to cover its liabilities and become insolvent and defaulted. Credit risk is of utmost importance not only for the enterprises but also for financial institutions (banks), which try to eliminate any possible losses from insolvent clients. Most of the enterprises in Europe are SMEs (Small and Medium Enterprises). Manufacturing sector is one of the most important, especially in Western Europe. The aim of the current study is to evaluate credit risk of European SMES manufacturing companies for the period 2012-2014 under different schemes, with the use of a popular statistical approach, namely logistic regression. The results of the analysis imply that even with a mixed and unbalanced data set with a small number of defaults, the applied method perform well and provide meaningful results. The results of this paper could help the owners and the financial managers of SMEs in European Union in their financial decisions and strategic investments so as to be able to avoid credit risk and future bankruptcy. More viable SMEs in European Union may mean more development and less unemployment.

     

    JEL classification numbers: G30, G32, G33

    Key Words: Credit risk, SMEs, Manufacture, Logistic Regression.