CREDIT PROFILES AND RATING MIGRATION OF

SMES IN THE ASIAN EMERGING

ECONOMIES

By:

Khusboo Agarwal

958, Semester V

(Under the guidance of Dr.Rituparna Das)

THE CONCEPT OF CREDIT PROFILING

Definition: A document that contains the complete listing of all the credit information.

Significance: Used by lenders and other agencies which offer credit to determine someone's creditworthiness, and they are also utilized by prospective landlords and other people who might have an interest in someone's credit history.

THE CONSTITUENTS OF CREDIT PROFILE

CREDIT RATING MIGRATION/TRANSITION Definition: The upgrading or worsening in a

credit's ranking and credit grade over time. It is the migration of a debt instrument from one rating to another rating over a period of time.

Credit Rating Agencies: The International Rating Agencies such as S&Ps, Moody's, and Fitch assess the credit quality of all the debt instrument in their portfolio and assign a rating to the credit quality. This rating changes as and when new information is available about the obligor's financial health.

CREDIT RATING PROCESS

SLABS OF CREDIT RATING

THE WORLD OF SMALL AND MEDIUM ENTERPRISES

Small Enterprise

Between 25,00,000 (Rupees Twenty-Five Lakhs only) to  5,00,00,000 (Rupees Five Crores only).

Between 10, 00, 000 (Rupees Ten Lakhs only) and 2,00,00,000 (Rupees Two Crores only).

Medium Enterprise

Between 5,00,00,000  (Rupees Five Crores only) to 10,00,00,000 (Rupees Ten Crores only).

Between 2,00,00,000 (Rupees Two Crores only) and Rs. 5,00, 00,000 (Rupees Five Crores only).

The international criterion to define SMEs are the number of employees, total net assets, sales and investment level.

PROBLEMS FACED BY SMES IN ASIA Small and medium sized enterprises (SMEs) are the key

to employment and innovation in Asia, but they are often starved of credit, information and support services. Over 90 per cent of companies in Asia are SMEs and they contribute to over 60 per cent of GDP, and more than two-thirds of employment and most innovations. As Asia seeks to transition to a new era of growth, correcting these weaknesses will often determine success or failure.

SMEs are hindered not just by a lack of financing, but also by serious non-financial constraints, such as insufficient skills and technology, high transaction costs, poorly defined property rights, inadequate market access and poor coordination of government SME support.

Asia needs to promote SME development in a more holistic manner, with closer public-private collaboration to create a supportive and technology-enabled ecosystem for SMEs to thrive.

CHINA SMEs number 42mn accounting

for 99.8% of enterprise and 75% urban employment. Their contribution to the economy is immense at 60% of GDP, 68% of export volume and 50% tax income. They also account for 66% of patent applications and 82% of new products.

In recent years, in addition to the effect of the abrupt slowdown in the winter of 2008-09, businesses have faced challenges from new labor regulations and environmental regulations.

According to the official estimates, 7.5% of the SMEs have already gone out of business by end-2008.

FINANCING OF SMES IN CHINA Scott and Wang (2006) state that there are several sources of finance

available for SMEs in China. However, types of finance that are both available and obtainable differ for SMEs in different life cycle of the enterprises. They mentioned the following sources of finance available for SMEs in China: 

Personal savings: This form of financing is usually preferred if it is available as it does not require any interest payments in a fixed nature. Therefore, due to difficulties in finding and obtaining loan at the start-up stage, most owners of the small enterprises usually invest their own savings.

Loan from immediate friends and relatives: This is another source of finance for SMEs in China as majority SMEs are organized and opened with the help of this type of financing. Due to strong family culture inChina, the access to this type of financing is easier than it can be found in EU or theUS.

Trade credits: Zhuo (2001) stated that trade credits is one of the financing sources for SMEs in China as it gives them the privilege of paying back to their suppliers later. This is also considered to be a good form of financing methods as small and medium sized enterprises usually struggle with cash at the early stage of their business operations. However, getting a trade credit also requires SMEs to provide healthy and strong cash flow statements, where in many cases it is impossible.

Bank loans: Banks loans are crucial sources if financing any business in most countries due to the length and lower interest rates than the equity. However, obtaining a bank loan is another obstacle in financing SMEs in China. This is due to the fact that most of the banks are state-owned commercial banks that hold most of the deposits and lending power in the country. Therefore, due to their relatively large and monopoly position, commercial banks usually prefer to lend money to large and listed companies as they are less risky than SMEs in terms defaulting the interest payments.

Moreover, commercial banks usually offer excessively large amounts of loan that is much more than the needs of SMEs, therefore, they are less interested in issuing loan to SMes due to economies of scale.

Furthermore, the credit ratings required to obtain a loan from these banks are really high, and in most cases SMEs credit ratings do not meet these high ratings requirements by state-owned banks (Fontes, 2005).

CREDIT RATING OF SMES IN CHINA

Financial Conditions • Liquidity ratios – Quick ratio (Percentage) – Current ratio (Percentage) • Leverage ratios – Times-interest-earned (times) – Total debt to assets (percentage) – Debt to equity ratio (Percentage) • Profitability ratios – profit margin (Percentage) – ROS, i.e. rate of sales (Percentage)

– return on net assets(Percentage) – ROE, return on equity (Percentage) • Efficiency ratios – Inventory turnover (time) – Receivable turnover (time) – Assets turnover (time) Characteristic and Perspective of the products • product marketability (Linguistic value) • product market share (Percentage) • product perspective (Linguistic value) 3. Operation Risk and Competitive Strength • running risk (Linguistic value) • technologies and R&D ability (Linguisticvalue)

5. Conditions of Industry • Macro-industry policies (Linguistic value) • industry risk in the next year (Linguistic value) • economic condition prediction in the next year (Linguistic value) 6. Management Measure

INDIA Small and medium enterprises

(SMEs) have been the backbone of the Indian economy. That is both a good and a bad thing.

The Good Part: Employing close to 40% of India's workforce and contributing 45% to India's manufacturing output, SMEs play a critical role in generating millions of jobs, especially at the low-skill level. The country's 1.3 million SMEs account for 40% of India's total exports.

The Bad Part: The bad thing is that SMEs in India, due to their low scale and poor adoption of technology, have very poor productivity. Although they employ 40% of India's workforce, they only contribute 17% to the Indian GDP.

CREDIT RATING AGENCIES SMERA Ratings Ltd (SMERA) is a full service credit

rating agency exclusively set up for micro, small and medium enterprises (MSME) in India. It provides ratings which enable MSME units to raise bank loans at competitive rates of interest. However, its registration with Securities Exchange Board of India SEBI as a Credit Rating Agency and accreditation by Reserve Bank of India RBI in September 2012 as an external credit assessment institution (ECAI) to rate bank loan ratings under Basel II guidelines has paved way for SMERA to rate/grade various instruments such as: IPO, NCDs, Commercial Papers, Bonds, Security Receipts, Fixed Deposits etc. In addition to this, RBI has told that Banks may use ratings of bank facilities (Bank Loan Ratings) from SMERA, to assign risks to loans for the purpose of computing capital adequacy requirements.[

CRISIL provides the widest range of ratings in India and has rated and assessed 60,000 MSMEs, which is by far the highest number anywhere in the world. Several of India's largest companies use our customised SME assessment services to evaluate their vendors, dealers, distributors, and franchisees.

Company Name CityRating 

AssignedDate 

Assigned* Constitution

A K Traders Indore SME 5 30/09/2013 Proprietorship

A N Traders Private Limited

New Delhi SME 2 07/04/2014 Private Limited

A T E Enterprises Private Limited

Mumbai SME 2 06/03/2014 Private Limited

A and A International Trading Private Limited

Chennai SME 2 26/06/2014 Private Limited

A and W Promoters & Developers Private Limited

Belgaum SME 5 27/06/2014 Private Limited

A. B. Pal Electricals Private Limited

New Delhi SME 2 27/01/2014 Private Limited

A. B. Plasto Private Limited

New Delhi SME 4 28/07/2014 Private Limited

A. B. Polymer Industries Patna SME 5 30/06/2014 Partnership Firm

A. B. Smelters Private Limited

Howrah SME 4 11/03/2014 Private Limited

A. D. Wines Una SME 4 22/01/2014 Partnership Firm

BENEFITS OF CREDIT RATING

Concessional funding: A good rating can help you gain faster and cheaper credit for your venture. The agencies that provide rating for SMEs—Crisil Ratings, SME Rating Agency of India (SMERA), Icra, Credit Analysis & Research (CARE), Onicra, and Fitch—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.

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. "In some cases, banks have approached them with funds," says Ramraj Pai, director, Crisil Ratings. SMERA feedback suggests that enterprises enjoy interest rate concessions to the extent of 0.25% to 1%. "In many cases, savings from the reduced borrowing cost exceeds the rating fee," says Parag Patki, CEO, SMERA.

"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," says Munhot.

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. "You can submit credit rating for tenders and make yourself more credible to get bigger orders. It also provides easier access to other sources of finance such as private equity," says Pai. "Better ratings have helped the SMEs retain customers and suppliers, and negotiate better terms with them," says Patki.