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 capacity of MSME

 Minimize the difference in the judgment on the repayment  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 MSMEs and NSIC is working towards it

 Alignment is necessary to make credit rating system work  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. culture and rely on SMERA under compulsive Basel II stipulations for SME rating.

 Take the help of external experts who understand the banks risk

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. to 5011 in 2008-09 from 671 in 2005-06.

The number of units awarded credit ratings increased NSIC started a scheme called ‘Performance and Credit

Rating Scheme for Micro and Small Enterprises’. credit rating of MSME widely acceptable.

MSME industry is formulating guidelines to make the Alignment

of two methodologies will possibilities of denial of loans to MSMEs.

reduce

the

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. related Governmental Organizations

So number of initiatives were taken by FIs and other 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 Appraisal/Condition indicator and a size indicator

 SMERA Rating consists of 2 parts, a Composite

 SMERA Rating categorizes SMEs based on size,

so as to enable fair evaluation of each SME amongst its peers

THANK YOU

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