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