Credit Rating of SMEs: The India...

Confidential | © SMERA Ratings Limited

Credit Rating of SMEs: The India Experience

Sankar ChakrabortiChief Executive OfficerSMERA Ratings LimitedDate: 1st September 2015Location: Turkey, Istanbul

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Flow of the Presentation

Why credit rating of SME’s?

How Successful is Rating of SME’s in India?

What did SMERA’s SME Ratings help the stakeholders achieve?

Why is SME Rating so crucial for India and other developing countries?

What next?

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About SMERA

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• Promoted by Small Industries Development Bank of India (SIDBI) and Dun & Bradstreet India (D&B).

• Accredited by Reserve Bank of India (RBI); registered with Securities and Exchange Board of India, (SEBI) to

provide rating / grading services

• Other shareholders include - eight private sector and two public sector banks of India.

• Rated over 36,000 SMEs of, across industries.

• SMERA has offices in over 12 cities of India.

Over the last 10 years, SMERA has built its reputation for accurate assessment or risk, prompt delivery of

service and high commitment towards clients.


Why credit rating of SMEs?

SMEs in India do not have easy access to debt/capital markets

Primary source of funding is Banks

26.71 trillion USD is the estimated need of funds of which only 25% is met by banking system. The rest comes through unorganized money lenders, friends and relatives

Timely availability of funds and the cost of fund is the most serious problem for growth

High information asymmetry leads to lack of trust for the segment

Hence any transaction whether it is an application for funds, equity or sales requires timely, reliable, independent opinion on credit quality, and future performance

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Rating of SMEs in India

120,000 SME entities are rated so far since the beginning of the concept in

2005

Supported by a subsidy available from Government of India

Support from all banks in India through interest rate benefit

Huge opportunity : Population of SME entities (Est. 35 to 45 million in India)

USD 800 – 1000 per assignment within reach of the micro and small entities

Highest standard of analytical rigor through efficient process

o Site visit/management interaction

o Use of high quality database and benchmarks

o Automation of workflows

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Over 15000 rated units stand to benefit in terms of borrowing cost

Over 17% profit growth for rated, higher than that of unrated universe

More than 30% growth in bank credit against 19 % credit growth for SME sector

Approximate sales increase of 25%

Creating employment opportunities

Impact of Ratings towards SME sector


SME Rating : Building the stakeholders confidence

Information Availability

Financial Reporting Standards

Management /Infrastructure Quality

Mindset - To show less turnover; for saving tax

SME Rating bridging the trust

deficiency


Provide Credit Ratings to SMEs

Provide SME / Project Grading Services to banks

Complement efforts of SME Development Institutions

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Show-case high-performing SMEs to global audience

Improve lending environment

SME Cluster Studies

What can a SME centric rating agency do?


About NSIC-D&B-SMERA Rating

Rating Scale of NSIC-D&B SMERA Rating

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• SMERA scale considers two parameters for rating – Performance capability and Financial strength

• Performance capability is measured on the scale of one to five, with one being the highest and five, the poor

• Financial strength is measured on the scale of ‘A’ to ‘C’, with ‘A’ being the high financial strength and ‘C’ being the low financial strength

ParametersFinancial Strength

Scale High Moderate Low

Performance Capability

Highest SE 1A SE 1B SE 1C

High SE 2A SE 2B SE 2C

Moderate SE 3A SE 3B SE 3C

Weak SE 4A SE 4B SE 4C

Poor SE 5A SE 5B SE 5C

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Rating Factor Schema

Financial Parameters Non-Financial Parameters

Solvency Liquidity ActivityProfitability

Industry Risk

Business Risk

Management Risk

Trend Analysis

Over-riding factors

Project Risk

Standard Rating Methodology & Criteria


Snapshot of SME Report

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SME Cluster reports

Help policymakers in formulating SME friendly policies

Help strategists at Banks

Database & Benchmarking

Help Banks in identifying opportunities

Help creditors take lending decisions

Expand coverage of more SME

Training of SMEs to help

them grow profitably.

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What next?

Strategic tie ups with local bodies for

promotion of SMEs within their country

Credit Rating of SMEs: The India...

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