Group 4
CREDIT RATING OF MSMEs
Arihant Jain
Alpana Tahlani
Komal Bohra
Mayuri Agarwal
Parv Verma
Priya Phakke
Treesa Joseph
Varun Gupta
OVERVIEW OF THE CASE
Norms for rating MSMEs on anvil
Guidelines to align the rating methodologies of rating
agencies and commercial banks
Minimize the difference in the judgment on the repayment
capacity of MSME
Guidelines being drafted through NSIC and the entity
formed under the control of ministry of MSMEs
Rating of MSEs by rating agencies is not accepted by many
commercial banks and financial institution (not confident)
But rating agencies says that banks are not capable of
properly judging the repayment capacity
Alignment is necessary to make credit rating system work
MSMEs and NSIC is working towards it
Credit rating is necessary under Basel 2
The concern for banking fraternity is the credibility of
rating agencies
The whole situation is not in favor of MSMEs
THE WAY FORWARD
Ratings typically embody an assessment of the risk of loss due to
failure by given borrower to pay as promised, based on consideration
of relevant counter party and facility characteristics.
Banks’ rating architecture is different from the rating agencies
Banks can take advantage of the Credit Appraisal and Rating Tool
(CART) as well as a Risk Assessment Model (RAM) and a
comprehensive rating model for MSMEs, developed by SIDBI or
consider the ratings given by reputed credit rating agencies as
initiated by NSIC and whenever appropriate, structure the interest
rates in tune with these ratings.
Take the help of external experts who understand the banks risk
culture and rely on SMERA under compulsive Basel II stipulations for
SME rating.
FOCUS & RELEVANCE OF
THE CASE
Credit rating for the SME sector
BASEL II norms
Banks reaction on external rating
Demand for Credit rating
Funds at lower rate
Fund starved sector
PRESENT SCENARIO
More than 16000 MSMEs units have filed applications
with various credit rating agencies till Sept 2009.
The number of units awarded credit ratings increased
to 5011 in 2008-09 from 671 in 2005-06.
NSIC started a scheme called ‘Performance and Credit
Rating Scheme for Micro and Small Enterprises’.
MSME industry is formulating guidelines to make the
credit rating of MSME widely acceptable.
Alignment of two methodologies will reduce the
possibilities of denial of loans to MSMEs.
SIGNIFICANCE AND ROLE
OF CREDIT RATING
AGENCIES
With each Bank/FI having separated rating processes
and disclosures requirements for the purpose of
disbursing loans, the SMEs were finding themselves
spending significant time, effort and money while
approaching different banks/ PIs for their credit
requirements.
So number of initiatives were taken by FIs and other
related Governmental Organizations
The basic objective of these initiatives was to
provide comprehensive assessment of the overall
condition of SME to reflect its creditworthiness,
adjudged in relation to other SMEs.
BENEFITS OF THE
INITIATIVES….
Benefits for SMEs:
It enables best SMEs to better differentiate themselves
among other SMEs
Objective assessment by credible and neutral third party
Faster access to funding at appropriate interest rate and
other terms
Credibility with business partners – customers, suppliers
and collaborators
A tool for self improvement – gives a comparative
benchmark
Benefits for Banks/ FIs:
Ready available third party opinion
Rating report provide relevant information for loan
approval
Facilitates lending decision – quantum of loan, price,
margin
Benefits to SME Sector:
Will improve credit inflow, transparency, discipline and
best practices
Will reduce information asymmetry
BENEFITS OF CREDIT
RATING
Rapid growth of the SME sector
SMEs can leverage their ratings
Facilitates faster processing of credit facilities
To enhance their credibility with other counterparties
Getting bank funds at a slightly lower rate of interest
Rating exercise can help SMEs understand better
Greater transparency,
MISCONCEPTIONS
• Assumption that SMEs will only get low ratings
because of their smaller size.
• Will SMEs be able to provide quality, reliable
information required for a credit rating
exercise?
• Fees of rating agencies unaffordable.
It takes into account the financial condition and
several qualitative factors that have bearing on
credit worthiness of the SME
SMERA Rating consists of 2 parts, a Composite
Appraisal/Condition indicator and a size indicator
SMERA Rating categorizes SMEs based on size,
so as to enable fair evaluation of each SME
amongst its peers
THANK YOU