Approaching a credit rating agency is a good option for small and medium enterprises (SMEs) given the problems they face in seeking finance. Rating agencies assess a firm's financial viability and capability to honour business obligations, provide an insight into its sales, operational and financial composition, thereby assessing the risk element and highlights the overall health of the enterprise.

1. Role of Credit Rating
Agencies
Part 8
Empowering MSMEs Role of Banks & Financial
Institutions, IT, Skill Development & Rating Agencies

2. Role of Credit Rating Agencies
Approaching a credit rating agency is a good option for small and medium
enterprises (SMEs) given the problems they face in seeking finance. Rating
agencies assess a firm's financial viability and capability to honour business
obligations, provide an insight into its sales, operational and financial
composition, thereby assessing the risk element and highlights the overall
health of the enterprise. They also benchmark its performance within the
industry.

3. Role of Credit Rating Agencies
Rating agencies usually have eight grades, ranging from SME 1-8, with 1
denoting the highest rating and 8 the lowest. For providing this service, the
agencies charge a fee which is based on the firm's turnover and ranges from
Rs.44,000 to Rs.1.21 lakh. These ratings are valid for a year and can be
renewed by paying an appropriate fee. It is money well spent. For, a good
rating means a higher chance of bagging a loan.
Besides, there is a lot of information asymmetry in the market. A good credit
rating provides the initial confidence for the project and also acts as a final
confirmation.

4. Benefits of rating
Concessional funding
A good rating can help you gain faster and cheaper credit for the venture. The
agencies that provide rating for SMEs are Crisil Ratings, SME Rating Agency of
India (SMERA), ICRA, Credit Analysis & Research (CARE), Onicra , and Fitch. These
agencies have tie-ups with several banks to offer preferential interest rates
based on ratings. For instance, Crisil Ratings has such a working arrangement
with 35 banks and financial institutions, while SMERA has entered into such
pacts with 29 institutions.

5. Benefits of rating
According to Crisil Ratings, the interest rate reduction for its clients ranges
from 0.5-1.25% and around 35% of the enterprises have reported a reduction
in the loan processing time. SMERA feedback suggests that enterprises enjoy
interest rate concessions to the extent of 0.25% to 1%. Also in many cases,
savings from the reduced borrowing cost exceeds the rating fee.
If a firm gets a good rating, he can even approach other banks to get a better
rate bargain than the one provided by his existing banker.

6. Benefits of rating
Better business opportunities
The independent risk evaluation of SMEs by an unbiased third party lends
credibility to them and opens doors for them while dealing with MNCs and
Corporates. They can also submit credit rating for tenders and make
themselves more credible to get bigger orders. It also provides easier access
to other sources of finance such as private equity. Better ratings have helped
the SMEs retain customers and suppliers, and negotiate better terms with
them.
The government also favours rated SMEs, restricting certain contracts for such
firms. It also operates a performance and credit rating scheme through
various credit rating agencies via the National Small Industries Corporation.
The scheme provides a one-time subsidy to SMEs to get rated.

7. Benefits of rating
Tools for self-improvement
Another advantage of rating is that the highlighting of strengths and
weaknesses acts as a trigger for self-correction. A regular renewal of ratings
not only helps improve a firm's performance but also builds confidence within
the lender fraternity and trading channel. It is like a report card for SMEs. The
analysis helps them to continuously evolve based on the changing regulation,
business requirements and economic scenario.
SMEs are usually deterred by the rigour of rating discipline and fear of low
rating, but the latter may not necessarily be the result of weak financials and
can be attributed to various reasons. "The issues can be easily pointed out in
the rating report. The SMEs that want to run a sustainable business take the
feedback positively and try to improvise. It is an opportunity to implement
best business Practices.

8. Benefits of rating
Increased visibility
Rating increases visibility and credibility on the SME. Since rating is an
independent third party opinion on creditworthiness, it helps in providing
confidence to the lenders and various stakeholders. With higher credibility
the SMEs are able to acquire funds from various avenues which otherwise
would not be keen on lending.

9. Agencies working for Credit rating
rating
Agencies working for Credit rating
National Small Industries Corporation Limited (NSIC)
A PSU established by the Government of India in 1955. It falls under Ministry
of Micro, Small & Medium Enterprises of India. It checks performance and
credit rating scheme for Small scale industries.
There is a need to create awareness amongst Small-Scale Units about the
strengths and weaknesses of their existing operations and to provide them an
opportunity to enhance their organizational strengths. As a step in this
direction, a need was felt for introducing a Rating Scheme for the Small Scale
Industries.

10. Agencies working for Credit rating
It is expected that the Rating Scheme would encourage SSI sector in
improving its contribution to the economy by way of increasing their
productivity, since a good rating would enhance their acceptability in the
market and also make access to credit quicker and cheaper and thus help in
economizing the cost of credit.
Performance & Credit Rating Scheme for Small Scale Industries has been
formulated in consultation with various stakeholders i.e. Small Industries
Associations, & Indian Banks’ Association and various Rating Agencies viz.
CRISIL, ICRA, Dun & Bradstreet (D&B) and ONICRA. It has the approval of the
Government.

11. Agencies working for Credit rating
SME rating agency of India
SMERA Ratings Limited (formerly SME Rating Agency of India Ltd.) is a joint
initiative of Small Industries Development Bank of India (SIDBI), Dun &
Bradstreet Information Services India Private Limited (D&B) and leading
public and private sector banks in India. SMERA commenced its operations in
2005 as an exclusive credit rating agency for Micro, Small and Medium
Enterprises (MSME) sector in the country. Within a span of eight years,
SMERA has assigned ratings to over 28,000 MSMEs across India.

12. Agencies working for Credit rating
SMERA is registered with the Securities and Exchange Board of India (SEBI) as
a Credit Rating Agency (6th in India). SMERA is also empanelled as an
approved rating agency by the National Small Industries Corporation Ltd.
(NSIC) under the ‘Performance & Credit Rating Scheme for Small Industries’
approved by the Ministry of Small Scale Industries, Government of India.

13. Agencies working for Credit rating
CARE SME Rating
CARE introduced SME ratings in 2006, which is intended entirely for Small and
Medium Scale Enterprises. CRISIL has two separate scales on which it assigns
ratings to SMEs: the NSICCRISIL Performance and Credit Rating (NSIC-CRISIL)
scale for small scale industries (SSIs), and the CRISIL SME Rating scale. CRISIL’s
ratings on small and medium enterprises (SMEs) reflect the rated entities’
overall creditworthiness, adjudged in relation to other SMEs. These ratings
are entity-specific, and not specific to debt issuances. CARE is a leading rating
agency in India recognized by the major regulators of the financial market viz
SEBI and RBI. CARE’s unbiased opinion is trusted by various investor
communities.

14. Agencies working for Credit rating
ICRA SME rating
ICRA has developed a separate SME Rating Scale that covers all MSMEs,
including those that are eligible for the NSIC-ICRA Performance and Credit
Rating Scheme. While Rating SMEs (including Micro Enterprises), ICRA
evaluates factors such as the candidate SME’s management, ownership,
organisation structure, key human resources, business environment,
relationships with trade partners, financial strength, operating efficiency and
capabilities, and other non-financial parameters that may have a bearing on
its creditworthiness. Among other things, an ICRA SME Rating seeks to bridge
the “information gap” that a lender may face while evaluating a credit
proposal made by an SME. The ICRA SME Rating Scale is linear, which makes it
easily comparable with the internal rating scales of most banks.

15. Agencies working for Credit rating
SME Rating Scale
SME 1 The Highest Credit Quality
SME 2 The High Credit Quality
SME 3 The Adequate Credit Quality
SME 4 The Moderate Credit Quality
SME 5 The Inadequate Credit Quality
SME 6 The Risk – Prone Credit Quality
SME 7 The Poor Credit Quality
SME 8 The Lowest Credit Quality

16. Process of Credit Rating in MSME
Process of Credit Rating in MSME
The Rating process starts from getting the request from the company which
need to be rated. The rating agency has got the definite idea of transparent,
reliable, time bound and customer friendly. The Rating process begins with
the receipt of rating mandate along with the application form and ends with
the dispatch of the Rating report and Rating certificate. The Rating process in
brief is enumerated below:

17. Process of Credit Rating in MSME
After getting the request from the company, the company has to file the
necessary application along with list of documents required for the rating
agency to conduct the research about the organization along with the
necessary fee. After submitting the documents, the rating agency team will
have direct site visit to the company and they will have detailed discussion
with the management about their vision, problems, benefits etc to have an
over sight about the company. They will also talk to their supplier, customers,
bankers about the performance of the company in terms of timely delivery of
finished goods and inventory management.

18. Process of Credit Rating in MSME
After their discussion, the rating agency will start doing the rating process
with the preset conditions laid down for SME with their rating scale.
Once the rating team has finished the rating module, it will be transferred
to the rating committee which will consist of eminent team with industry
expertise and they will analyze the rating formula and the company’s
documents. Once they have verified all the documents, then the rating
committee will decide what scale can be allotted to the company. Once that is
decided, then the rating agency will complete the rating and send the rating
report to the company.

19. Process of Credit Rating in MSME
The company will have rights to accept all the conditions laid down in the
rating report or they can provide additional information to prove their
company to be upgraded. Once the submitted documents are satisfying the
committee, then they will upgrade or maintain the same standard to the
company and submit the same to the company.
Once the rating mechanism is over and rating has been done, then the
management of SME can take the same to the banker for getting the facility
for their business improvement.

20. Conclusion
The importance of MSME has been recognized in recent years for its
significant contribution in gratifying various socio-economic objectives such
as higher growth of employment, output, promotion of exports and fostering
entrepreneurship. They play a crucial role in the industrial development of
any country. This sector even assumes greater importance now as the country
moves towards a faster and inclusive growth agenda. MSMEs have also
shown an ability for innovation, creativity, and flexibility which qualifies them
to respond promptly to changing market conditions and to adapt the dynamic
needs of the consumers.

21. Conclusion
Therefore, this sector needs special attention of the state government, policy
makers and implementation. This is all the more necessary and a very
powerful engine realizing the twin objectives of “accelerated industrial
growth” and “creation of additional productive employment potential” in
rural and backward areas. There are only 1.5 million MSME units are in
registered segment and employment, finance and other activities of only
these units are recorded with the government. There is an urgent need to
have a policy to record all units to understand the actual position of
employment as on date and employment generation opportunities exist in
this sector in future. This will enable policy makers to decide the course of
action, such as creation of cluster, providing suitable infrastructure, market,
product development, finance etc.

22. Conclusion
Adequate and timely availability of Finance is one of the most important key
inputs for any business. Although, Banks in India have been providing
financial facilities to MSMEs through their branch offices, regional offices in
across the length and breadth of the country, however, there are still many
gaps and challenges and we can say there are still miles to go in order to
improve the access to timely credit to entrepreneurs in the MSME sector.

23. Conclusion
One of the key challenges faced by MSME sector in India is the lack of skilled
labor. Despite the huge pool of human resources in India, MSMEs struggle to
find the required skilled labor at affordable wages. Even though MSMEs are
investing in infrastructure, technology and manufacturing practices,
development of skilled manpower still remains a major concern. There is
evidence that suggests that MSMEs that have invested in skill development
have witnessed better business performance. Skill development programs
with a blend of industrial engineering, quality management, general
management and soft skills can enable the MSMEs to reach the next level of
growth.

24. THANK YOU
Email: jyoti.gadia@resurgentindia.com Call Us: +91 124 4754550
www.resurgentindia.com
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