CREDIT RATING OF MSMEs

8/14/2019 CREDIT RATING OF MSMEs

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Group 4CREDIT RATING OF MSMEs

Arihant JainAlpana TahlaniKomal BohraMayuri AgarwalParv Verma

Priya PhakkeTreesa JosephVarun Gupta


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OVERVIEW OF THE CASENorms for rating MSMEs on anvil

Guidelines to align the rating methodologies of ratingagencies and commercial banks

Minimize the difference in the judgment on the repaymentcapacity of MSME

Guidelines being drafted through NSIC and the entityformed under the control of ministry of MSMEs

Rating of MSEs by rating agencies is not accepted by manycommercial banks and financial institution (not confident)


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But rating agencies says that banks are not capable ofproperly judging the repayment capacity

Alignment is necessary to make credit rating system workMSMEs and NSIC is working towards it

Credit rating is necessary under Basel 2

The concern for banking fraternity is the credibility ofrating agencies

The whole situation is not in favor of MSMEs


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THE WAY FORWARDRatings typically embody an assessment of the risk of loss due to

failure by given borrower to pay as promised, based on considerationof 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 acomprehensive rating model for MSMEs, developed by SIDBI orconsider the ratings given by reputed credit rating agencies asinitiated by NSIC and whenever appropriate, structure the interestrates in tune with these ratings.

Take the help of external experts who understand the banks riskculture and rely on SMERA under compulsive Basel II stipulations forSME rating.


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FOCUS & RELEVANCE OF

THE CASECredit rating for the SME sector

BASEL II norms

Banks reaction on external rating

Demand for Credit rating

Funds at lower rate

Fund starved sector


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PRESENT SCENARIOMore than 16000 MSMEs units have filed applications

with various credit rating agencies till Sept 2009.

The number of units awarded credit ratings increasedto 5011 in 2008-09 from 671 in 2005-06.

NSIC started a scheme called Performance and CreditRating Scheme for Micro and Small Enterprises.

MSME industry is formulating guidelines to make thecredit rating of MSME widely acceptable.

Alignment of two methodologies will reduce thepossibilities of denial of loans to MSMEs.


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OF CREDIT RATING

AGENCIESWith each Bank/FI having separated rating processes

and disclosures requirements for the purpose ofdisbursing loans, the SMEs were finding themselvesspending significant time, effort and money while

approaching different banks/ PIs for their creditrequirements.

So number of initiatives were taken by FIs and otherrelated Governmental Organizations

The basic objective of these initiatives was toprovide comprehensive assessment of the overallcondition of SME to reflect its creditworthiness,adjudged in relation to other SMEs.


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INITIATIVES.

Benefits for SMEs:

It enables best SMEs to better differentiate themselvesamong other SMEs

Objective assessment by credible and neutral third partyFaster access to funding at appropriate interest rate and

other terms

Credibility with business partners customers, suppliersand collaborators

A tool for self improvement gives a comparativebenchmark


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Benefits for Banks/ FIs:

Ready available third party opinion

Rating report provide relevant information for loanapproval

Facilitates lending decision quantum of loan, price,margin

Benefits to SME Sector:

Will improve credit inflow, transparency, discipline andbest practices

Will reduce information asymmetry


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BENEFITS OF CREDIT

RATINGRapid 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,


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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 ratingexercise?

Fees of rating agencies unaffordable.


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It takes into account the financial condition andseveral qualitative factors that have bearing on

credit worthiness of the SME

SMERA Rating consists of 2 parts, a CompositeAppraisal/Condition indicator and a size indicator

SMERA Rating categorizes SMEs based on size,so as to enable fair evaluation of each SMEamongst its peers


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THANK YOU

Documents

CREDIT RATING OF MSMEs