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Business

Japan's top bank to offer AI-based loan screening for startups

BTMU's new process will generate credit scores for businesses too young for typical applications

Bank of Tokyo-Mitsubishi UFJ is part of Mitsubishi UFJ Financial Group.   © Reuters

TOKYO -- Bank of Tokyo-Mitsubishi UFJ is building a new financing model for fledgling businesses that uses artificial intelligence to assess their credit prospects based on data not found in financial statements.

The unit of Mitsubishi UFJ Financial Group, Japan's most valuable banking group, on Tuesday will invest 100 million yen ($950,000) in Tokyo-based AI developer ExaWizards. The software developer will design the new screening model with MUFG financial technology subsidiary Japan Digital Design.

The technology should be ready as soon as fiscal 2019.

Applying for a bank loan typically entails meeting standard documentation requirements, such as three years of earnings statements, just to determine whether a company qualifies for financing.

Instead, BTMU envisions a flexible process powered by AI that scores firms' creditworthiness based on cash flows and other factors. That score is then used to quickly approve or deny the loan and determine an interest rate.

The AI system will analyze such data as the stability of the startup's top customers and suppliers as well as the company's record of paying expenses like salaries and rent on time. It will be able to differentiate between savings growth driven by rising sales each month or by a windfall profit. The system will learn on its own what factors it needs to consider, and how much weight to give them, in order to accurately assess a potential borrower's repayment prospects.

Startups often need the most financing before they are even a few years old, which is when they are most likely to fall through the cracks of typical loan screenings. AI could both eliminate this conflict and improve the accuracy of screenings.

Banks often do not assign relationship managers to small and midsize firms because these clients produce little business for them. BTMU believes it can cultivate this underserved segment of the corporate banking market in a cost effective way by developing an online application process that does not require face-to-face meetings.

Japan's other megabanks are also tapping into AI's potential. Sumitomo Mitsui Banking Corp., part of Sumitomo Mitsui Financial Group, is preparing to start using AI to look for changes in clients' fundamentals. Mizuho Financial Group's Mizuho Bank plans to use the technology to screen small businesses for loans starting in fiscal 2018.

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