Small and Medium Enterprises (SME), for years, have been the
‘common man’ of business fraternity. Though often referred to as the most
important part of the economic fabric of the country, hardly anything concrete
was done for their growth. However, of late, efforts have been made to bring
about a change in the way of working of SMEs through implementation of services
like rating of the enterprises, easy loans availability, information technology
and a host of schemes of the Government. But, the awareness level is still low.
A major obstacle in the SME development is its inability to
access timely and adequate finance. There are several reasons for low SME credit
penetration, key among them being insufficient credit information on SMEs, low
market credibility of SMEs (despite their intrinsic strengths) and constraints
in analysis. This leads to sub-optimal delivery of credit and services to the
sector. Availing credit rating from credit rating agencies can play an important
role in addressing some of these concerns.
But it has been observed that there are a few characteristics
of small entities in India e.g., they are often reluctant to disclose
actual sales/revenue or profit. This may be due to the fear of attracting higher
tax liability. SMEs also lack effective internal controls or audit. These areas
are ignored to save costs. But these practices only create problems for the firm
in the long run. Due to weak financial statements, bankers refuse to assist them
when they need funds. Therefore, these practices create hurdles in the growth of
SMEs and this is where the role of a credit rating agency comes into picture.
The rating agency can point out the issues which hinder the growth of SMEs. The
rating report can also help SMEs to implement best practices in their day-to-day
operations. The SMEs should be educated to maintain transparency in their
activities. The rating can help SMEs to create benchmark for themselves in
financial and other parameters.
Basic features of credit rating :
Credit rating is an estimate of the creditworthiness of an
enterprise or a country. It is an opinion made by credit evaluators of a
borrower’s potential to repay a debt. Every rating grade comes with its
probability of default, which in turn assists investors/lenders to take informed
investment decision.
Rating is arrived at after considering various financial,
non-financial parameters, past credit history and future outlook. There are
various types of ratings viz. Issuer Rating, Bank Loan Rating,
Issue-based Ratings, Project Rating, etc. based on type of borrower/issuer.
Ratings can also be classified based on the type of entity rated, such as
Individual Rating, Corporate Rating, Bank/Financial Institutions Rating, SME
Rating, MFI Rating, etc.
The advantage of rating symbols is their simplicity which
facilitates universal understanding. Rating companies also publish explanations
for symbols used as well as the rationale for the ratings assigned by them, to
facilitate better understanding.
The rating process is a fairly detailed exercise. It
involves, among other things, analysis of financial information, visits to the
customer’s office and works, intensive discussion with management, auditors,
bankers, etc. It also involves an in-depth study of the industry itself.
Rating does not come out of a pre-determined mathematical
formula. Rating agencies do a great amount of number crunching, but the final
outcome also takes into account factors like quality of management, corporate
strategy, economic outlook and international environment. To ensure consistency
and reliability, a number of qualified professionals are involved in the rating
process. The rating committee, which assigns the final rating, consists of
professionals with impeccable credentials. Rating agencies also ensure that the
rating process is insulated from any possible conflict of interest.
Ratings are based on an in-depth study of the industry as
also an evaluation of the strengths and weaknesses of the company. The inherent
protective factors, marketing strategies, competitive edge, level of
technological development, operational efficiency, competence and effectiveness
of the management, hedging of risks, cash flow, trends and potential, liquidity,
financial flexibility, government policies, past record of debt servicing, and
sensitivity to possible changes in business/economic circumstances are looked
into.
Credit rating experience gives SMEs an insight into corporate
credit analysis and methodologies for understating fundamentals of credit risk,
cash flow modelling, enlarging managerial skills and best practices in doing
business. Peer group comparisons help creating standardisation in units of SMEs
besides identifying risks for hedge and for grooming strategies, which exist,
for exploiting opportunities. Rating pinpoints the overall health of the
enterprise and explains exactly how the business will fit in relation to
competitors and how to deal with it.
Fear of lower rating :
Rating for SMEs as a concept is comparatively new in India.
They get themselves rated only when they are pushed by the banks; they go ahead
only when there is a fear of loss or hope of gain. There is a general
apprehension as to what if the rating goes bad ? There is also a fear among
several SMEs that if they get rated low, their value will come down and that may
act as a hurdle in raising funds. It is a valid point. But it should be
remembered that the fact that an enterprise has opted for rating process from a
rating agency.
Subsidy for rating fee :
In order to encourage SMEs to go for credit rating a scheme
named ‘Performance and Credit Rating scheme’ was formulated in consultation with
Indian Banks’ Association (IBA) and Rating Agencies. NSIC (National Small
Industries Corporation Limited) has been appointed as the nodal agency for
implementation of this scheme through empanelled agencies.
