SME Portfolio Segmentation

Definition

SME Portfolio Segmentation denotes the splitting of a Credit Portfolio in the context of SME Lending into smaller components according to some defined characteristics. The segmentation will be manifest in the internal organization of people, systems and process and visible e.g. in Risk Policy

For regulated institutions, there might be segmentation requirements stipulated in legislation.

Segmentation Objectives

The objective of portfolio segmentation is to help optimize Credit Portfolio Management but potentially many other business objectives as well. The focus of the article is on segmentation relevant in the context of Credit Risk.

Segmentation Characteristics

Segmentation can be meaningful along any of the following dimensions

• the market segment (e.g. micro versus small and medium sized)
• the origination channel (e.g. online, branch etc)
• the geographic location
• the cohort (origination period)
• the underwriting criteria (if there is significant change in policies)

Issues and Challenges

• Correct customer segmentation can a key factor for successful implementation of a SME Credit Scorecard model
• There is not intrinsic size metric to separate medium sized SME's from small SME's
• The segmentation criteria should be objective and reproducible over time
• The number of segments should not be too large (each segment should have a statistically meaningful number)

See Also

• Customer Segmentation