Empowering MSMEs - Benefits of Credit Rating in MSME - Part - 8

Role of Credit Rating Agencies

Part 8

Empowering MSMEs Role of Banks & Financial Institutions, IT, Skill Development & Rating Agencies


Approaching a credit rating agency is a good option for small and medium enterprises (SMEs) given the problems they face in seeking finance. Rating agencies assess a firm's financial viability and capability to honour business obligations, provide an insight into its sales, operational and financial composition, thereby assessing the risk element and highlights the overall health of the enterprise. They also benchmark its performance within the industry.


Rating agencies usually have eight grades, ranging from SME 1-8, with 1 denoting the highest rating and 8 the lowest. For providing this service, the agencies charge a fee which is based on the firm's turnover and ranges from Rs.44,000 to Rs.1.21 lakh. These ratings are valid for a year and can be renewed by paying an appropriate fee. It is money well spent. For, a good rating means a higher chance of bagging a loan. Besides, there is a lot of information asymmetry in the market. A good credit rating provides the initial confidence for the project and also acts as a final confirmation.

Benefits of rating

Concessional funding A good rating can help you gain faster and cheaper credit for the venture. The agencies that provide rating for SMEs are Crisil Ratings, SME Rating Agency of India (SMERA), ICRA, Credit Analysis & Research (CARE), Onicra , and Fitch. These agencies have tie-ups with several banks to offer preferential interest rates based on ratings. For instance, Crisil Ratings has such a working arrangement with 35 banks and financial institutions, while SMERA has entered into such pacts with 29 institutions.

Benefits of rating

According to Crisil Ratings, the interest rate reduction for its clients ranges from 0.5-1.25% and around 35% of the enterprises have reported a reduction in the loan processing time. SMERA feedback suggests that enterprises enjoy interest rate concessions to the extent of 0.25% to 1%. Also in many cases, savings from the reduced borrowing cost exceeds the rating fee. If a firm gets a good rating, he can even approach other banks to get a better rate bargain than the one provided by his existing banker.

Benefits of rating

Better business opportunities The independent risk evaluation of SMEs by an unbiased third party lends credibility to them and opens doors for them while dealing with MNCs and Corporates. They can also submit credit rating for tenders and make themselves more credible to get bigger orders. It also provides easier access to other sources of finance such as private equity. Better ratings have helped the SMEs retain customers and suppliers, and negotiate better terms with them. The government also favours rated SMEs, restricting certain contracts for such firms. It also operates a performance and credit rating scheme through various credit rating agencies via the National Small Industries Corporation. The scheme provides a one-time subsidy to SMEs to get rated.

Benefits of rating

Tools for self-improvement Another advantage of rating is that the highlighting of strengths and weaknesses acts as a trigger for self-correction. A regular renewal of ratings not only helps improve a firm's performance but also builds confidence within the lender fraternity and trading channel. It is like a report card for SMEs. The analysis helps them to continuously evolve based on the changing regulation, business requirements and economic scenario. SMEs are usually deterred by the rigour of rating discipline and fear of low rating, but the latter may not necessarily be the result of weak financials and can be attributed to various reasons. "The issues can be easily pointed out in the rating report. The SMEs that want to run a sustainable business take the feedback positively and try to improvise. It is an opportunity to implement best business Practices.

Benefits of rating

Increased visibilityRating increases visibility and credibility on the SME. Since rating is an independent third party opinion on creditworthiness, it helps in providing confidence to the lenders and various stakeholders. With higher credibility the SMEs are able to acquire funds from various avenues which otherwise would not be keen on lending.

Agencies working for Credit rating rating

Agencies working for Credit rating National Small Industries Corporation Limited (NSIC) A PSU established by the Government of India in 1955. It falls under Ministry of Micro, Small & Medium Enterprises of India. It checks performance and credit rating scheme for Small scale industries. There is a need to create awareness amongst Small-Scale Units about the strengths and weaknesses of their existing operations and to provide them an opportunity to enhance their organizational strengths. As a step in this direction, a need was felt for introducing a Rating Scheme for the Small Scale Industries.

Agencies working for Credit rating

It is expected that the Rating Scheme would encourage SSI sector in improving its contribution to the economy by way of increasing their productivity, since a good rating would enhance their acceptability in the market and also make access to credit quicker and cheaper and thus help in economizing the cost of credit. Performance & Credit Rating Scheme for Small Scale Industries has been formulated in consultation with various stakeholders i.e. Small Industries Associations, & Indian Banks’ Association and various Rating Agencies viz. CRISIL, ICRA, Dun & Bradstreet (D&B) and ONICRA. It has the approval of the Government.


SME rating agency of India SMERA Ratings Limited (formerly SME Rating Agency of India Ltd.) is a joint initiative of Small Industries Development Bank of India (SIDBI), Dun & Bradstreet Information Services India Private Limited (D&B) and leading public and private sector banks in India. SMERA commenced its operations in 2005 as an exclusive credit rating agency for Micro, Small and Medium Enterprises (MSME) sector in the country. Within a span of eight years, SMERA has assigned ratings to over 28,000 MSMEs across India.


SMERA is registered with the Securities and Exchange Board of India (SEBI) as a Credit Rating Agency (6th in India). SMERA is also empanelled as an approved rating agency by the National Small Industries Corporation Ltd. (NSIC) under the ‘Performance & Credit Rating Scheme for Small Industries’ approved by the Ministry of Small Scale Industries, Government of India.


CARE SME Rating CARE introduced SME ratings in 2006, which is intended entirely for Small and Medium Scale Enterprises. CRISIL has two separate scales on which it assigns ratings to SMEs: the NSICCRISIL Performance and Credit Rating (NSIC-CRISIL) scale for small scale industries (SSIs), and the CRISIL SME Rating scale. CRISIL’s ratings on small and medium enterprises (SMEs) reflect the rated entities’ overall creditworthiness, adjudged in relation to other SMEs. These ratings are entity-specific, and not specific to debt issuances. CARE is a leading rating agency in India recognized by the major regulators of the financial market viz SEBI and RBI. CARE’s unbiased opinion is trusted by various investor communities.


ICRA SME rating ICRA has developed a separate SME Rating Scale that covers all MSMEs, including those that are eligible for the NSIC-ICRA Performance and Credit Rating Scheme. While Rating SMEs (including Micro Enterprises), ICRA evaluates factors such as the candidate SME’s management, ownership, organisation structure, key human resources, business environment, relationships with trade partners, financial strength, operating efficiency and capabilities, and other non-financial parameters that may have a bearing on its creditworthiness. Among other things, an ICRA SME Rating seeks to bridge the “information gap” that a lender may face while evaluating a credit proposal made by an SME. The ICRA SME Rating Scale is linear, which makes it easily comparable with the internal rating scales of most banks.


SME Rating Scale SME 1 The Highest Credit Quality SME 2 The High Credit Quality SME 3 The Adequate Credit Quality SME 4 The Moderate Credit Quality SME 5 The Inadequate Credit Quality SME 6 The Risk – Prone Credit Quality SME 7 The Poor Credit Quality SME 8 The Lowest Credit Quality

Process of Credit Rating in MSME

Process of Credit Rating in MSME The Rating process starts from getting the request from the company which need to be rated. The rating agency has got the definite idea of transparent, reliable, time bound and customer friendly. The Rating process begins with the receipt of rating mandate along with the application form and ends with the dispatch of the Rating report and Rating certificate. The Rating process in brief is enumerated below:


After getting the request from the company, the company has to file the necessary application along with list of documents required for the rating agency to conduct the research about the organization along with the necessary fee. After submitting the documents, the rating agency team will have direct site visit to the company and they will have detailed discussion with the management about their vision, problems, benefits etc to have an over sight about the company. They will also talk to their supplier, customers, bankers about the performance of the company in terms of timely delivery of finished goods and inventory management.


After their discussion, the rating agency will start doing the rating process with the preset conditions laid down for SME with their rating scale. Once the rating team has finished the rating module, it will be transferred to the rating committee which will consist of eminent team with industry expertise and they will analyze the rating formula and the company’s documents. Once they have verified all the documents, then the rating committee will decide what scale can be allotted to the company. Once that is decided, then the rating agency will complete the rating and send the rating report to the company.


The company will have rights to accept all the conditions laid down in the rating report or they can provide additional information to prove their company to be upgraded. Once the submitted documents are satisfying the committee, then they will upgrade or maintain the same standard to the company and submit the same to the company. Once the rating mechanism is over and rating has been done, then the management of SME can take the same to the banker for getting the facility for their business improvement.

Conclusion

The importance of MSME has been recognized in recent years for its significant contribution in gratifying various socio-economic objectives such as higher growth of employment, output, promotion of exports and fostering entrepreneurship. They play a crucial role in the industrial development of any country. This sector even assumes greater importance now as the country moves towards a faster and inclusive growth agenda. MSMEs have also shown an ability for innovation, creativity, and flexibility which qualifies them to respond promptly to changing market conditions and to adapt the dynamic needs of the consumers.

Conclusion

Therefore, this sector needs special attention of the state government, policy makers and implementation. This is all the more necessary and a very powerful engine realizing the twin objectives of “accelerated industrial growth” and “creation of additional productive employment potential” in rural and backward areas. There are only 1.5 million MSME units are in registered segment and employment, finance and other activities of only these units are recorded with the government. There is an urgent need to have a policy to record all units to understand the actual position of employment as on date and employment generation opportunities exist in this sector in future. This will enable policy makers to decide the course of action, such as creation of cluster, providing suitable infrastructure, market, product development, finance etc.

Conclusion

Adequate and timely availability of Finance is one of the most important key inputs for any business. Although, Banks in India have been providing financial facilities to MSMEs through their branch offices, regional offices in across the length and breadth of the country, however, there are still many gaps and challenges and we can say there are still miles to go in order to improve the access to timely credit to entrepreneurs in the MSME sector.

Conclusion

One of the key challenges faced by MSME sector in India is the lack of skilled labor. Despite the huge pool of human resources in India, MSMEs struggle to find the required skilled labor at affordable wages. Even though MSMEs are investing in infrastructure, technology and manufacturing practices, development of skilled manpower still remains a major concern. There is evidence that suggests that MSMEs that have invested in skill development have witnessed better business performance. Skill development programs with a blend of industrial engineering, quality management, general management and soft skills can enable the MSMEs to reach the next level of growth.

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Empowering MSMEs - Benefits of Credit Rating in MSME - Part - 8

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