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SMEs need to avail benefits of credit rating: Rajesh Dubey
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Namrata Kath Hazarika | 13 Apr, 2010
In an exclusive interview with SME Times, Rajesh Dubey, Executive Director, ICRA Online Limited, said the number of SME entities who are availing the benefits of credit rating is a small percentage, and they (SMEs) have to take advantage of it in the future for the growth of the sector.
Excerpts of the interview...
How much MSMEs are benefited by the credit rating process?
Rajesh Dubey: As far as the Micro, Small and Medium Enterprises (MSMEs) are concerned, credit rating can be divided under two segments: one, is the subsidies available through NSIC which is the Performance and Credit related scheme available only to micro and small industries. And, the other segment is for the medium enterprises or for those enterprises who have already been rated earlier under the subsidy scheme of the government.
In the first scheme (for micro and small industries), we found that approximately around 10,000 and 12,000 entities have been rated in the last five years. It is picking up. In the last two years, it has picked really well. But, if we compare it with the total population and number of SMEs in India, it is a small percentage. And, the tendency of the rating agencies generally have been only to rate those entities who have some amount of financial statement in record. There are also some amount of audit elements involved in those entities.
Which type of entity can avail the benefit of rating?
Rajesh Dubey: Truly speaking, the micro or trading entities -- the large portion of the 3 million entities, who do not prepare a proper set of records that may be a trader or a shopkeeper, for them, the rating scheme may not be relevant because rating is not just a scoring model. It involves an analysis. Rating involves the balance sheets and the qualitative parameters. It also becomes a starting point, which means the financial statement becomes the starting point.
For, micro enterprises it may not be relevant. As far as the medium enterprises are concerned rating is useful and those entities which have been rated in the past, the concept of credit rating is already known to them. So it becomes easier for them to understand the benefits of rating.
Credit rating helps SMEs to get sufficient bank exposure. What is your take on this?
Rajesh Dubey: We will not call it SME rating. It would be called as bank loan exposure rating. Each and every bank wants that their clients should have a threshold limit of exposure of Rs. 5 crore or Rs 10 crores, and should be rated from one of the approved rating agencies. Credit rating helps for the capital provisioning requirement for SMEs.
Could you tell our readers the best rating agencies available in India?
Rajesh Dubey: The rating agencies approved for the purpose are ICRA, Crisil, Care and Fitch. In the first scheme there are four rating agencies those have been empanelled by RBI. Apart from these four, two others are SMERA and ONICRA. To sum up, I would say rating as a concept has been increasing.
Why are MSMEs reluctant of getting themselves rated?
Rajesh Dubey: First of all, the fear is that they may not get a good rating. Second is probably the financial statements that they have prepared to get rated do not reflect their true and fair picture of their performance. And, the rating agencies will not look beyond that.
These could be the two main reasons why SMEs may not be interested while going for a rating. But, it has been specifically ICRA's approach that financial statement is only a staring point, we look at the qualitative parameters more. We are mainly interested in the qualitative parameters because financial statements in micro and small medium enterprises do not give much idea about their performance. We need to look at what is their management and how sound a promoter is, or how resilient the SME has been.
Other factors we look into are: How has the promoter responded to such cycles? Those are factored in. What are the trade relationships and who are their supplier and customers? What is their consistency? What is the quality of product they are providing?
And then we do a comparison with other entities belonging to the same industrial sector and same size. When the same size industries are concerned we get to know how much a particular entity is comparatively positioned. When you look at the entire gamut of things one will find that financial statement is part of it and in that way the rating becomes much more meaningful.
Have you found any entity up till now involved in fraudulent activities?
Rajesh Dubey: The percentage will be very small. In fact, there would be entities who would have defaulted somewhere, like, they would have taken a loan from some other bank and this particular fact have not been revealed.
Yes, we come across such cases where they have defaulted to a bank and they have approached to another bank for loan and those banks have sanctioned the loans. For instance, the ways and means which are adopted are that loan has been taken by the name of a lady entrepreneur and the main operations are done in the name of the husband. If the loan has been taken in the name of the husband, he would have been defaulted. These are few cases.
How much successful have been the subsidy scheme provided by the government?
Rajesh Dubey: The subsidy scheme is quite good and the National Small Industries Corporations (NSIC) has been doing a good job. They are organizing seminars at various locations to promote the scheme. The performance and the credit rating scheme being operated by NSIC where 75 percent rating fees are subjected to maximum of Rs. 40,000 for an entity is subsidized by the government through NSIC. That's a very useful scheme.
SME entities are also unwilling to get themselves rated for the second time?
Rajesh Dubey: In that case, the rating agencies would not have done proper job at the first time. So, the entity needs to get some other benefits apart from the subsidies. If they have not got some other benefits along with the subsidy then they (SMEs) would not like to come back and get themselves rated.
They will say rating agencies that we have spent Rs 10,000 to 20,000 once, then why will we spend another amount to get rated. Actually, credit rating is just like any product or service. You use a service frequently to get some benefit out of it. So, the entity should actually get some benefits.
What kind of measures ICRA is implementing for credit rating to MSMEs?
Rajesh Dubey: In ICRA, we have very strict guidelines. We want to identify the reasons and communicate the reasons. We are very transparent. We are partnering with the entity in collecting the information for doing a meaningful exercise. And, once that is done, we are encouraging the entity to interact with us. In case, you are not able to understand a particular point, we would be more than happy to share information on that point. Rating agencies are generally conservative in their opinion.
We will not like to over commit something because if we say that the company will do really exceptional and if it does not do well then the name of the rating agency also gets affected. So, that is why when we rate an entity, we usually never assure an entity that we would be getting a good rating, but what we assure them (SMEs) is, we will be giving you (SME) the rating and give satisfactory reason as to why we have rated you (SME) so. And, we will encourage them to talk to the analysts who have done the rating of a particular company.
A rating agency must clear the reason to his customers although the rating has been a bad one. An entity who have been rated, if he feels that the rating agencies have not done a good job and the rating is bad, it doesn't mean that the rating services are bad.
If the reasons of bad rating is identified, then as an SME should be interested in overcoming those shortcomings and further improve the performance and rectify the problems. If that is not happening from the rating agencies point, the SME will not go for a renewal. I think rating agencies should be more responsible.
Will rating help MSMEs to draw private equity and venture capitalist firms?
Rajesh Dubey: Actually, Private Equity and Venture Capitalists firms would be interested in investing in a listed company. Credit ratings would help an entity to get an exposure. But yes, it will do help.
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Disagreement over some issues.
Sujit M Agrawal | Tue Apr 13 17:54:04 2010
The interviewee has mentioned that the credit rating may not be useful for micro enterprises and trading companies. But one should notice that no organisation has born directly as a medium or large enterprise. Organisations grow from micro to small level, from small to medium level and finally from medium to large level.
Therefore, its very much useful if the organisation takes the opinion of a professional credit rating agency at each and every point to have a check on their strengths and weaknesses. It helps in accelerating the growth process of the company. There is lot of support from government of India for rating of micro and small enterprises, so one should encourage more companies to come forward and get the professional activity done for their company. Therefore, I am of the opinion that the NSIC scheme is purely designed for micro and small enterprises, and they will be benefited out of it. Even RBI guidelines indicate that micro enterprises should be given preference while allotment of funds for the SME sector. External Credit rating is beneficial for bankers as well as SMEs when it comes to "loan from the bank". Brand building is the key for success of the organisation when its in nascent stage, therefore use of rating for brand building may prove vital for any company, which is in micro or small stage.
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Re: Disagreement over some issues.
Rajesh Dubey | Thu Apr 15 05:17:14 2010
Mr. Agrawal, you are right in saying that micro entities grow into Small & then to Medium & then to Big. But for them to do a meaninful exercise some base financial statements are required. Very small or micro entitities may not have any records apart from a kacha record. Such entities may not be ideal for rating. But wherever they have some discipline in maintaining financial statements and have got the same verified by an independent auditor, even though not required as per any regulation or income tax law, can benefit from a rating.
As I said, financial statements become the starting point for a rating exerise.
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Re: Re: Disagreement over some issues.
Sujit Agrawal | Sat Apr 17 16:09:00 2010
Dear Mr. Dubey, I agree with you that for carrying out rating exercise of a micro or small entity some basic financial documents are required. But my observation says that there are few basic characteristics of Micro & Small entities in India e.g. they are reluctant to show actual sales/revenue on paper, and actual profit as well. These practices are followed by them just to avoid tax liability or to avoid auditing of the firm, which involves cost. But these practices will only create problem for the firm in long run. And because of 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 role of a credit rating agency comes into picture. The rating agency can point out the issues which are creating hurdles in 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 micro & small enterprises to create benchmark for themselves in financial and other parameters. NSIC scheme of rating is based on two parameters viz. performance capability & financial strength. And the rating is combination of alphabets and numbers for financials and performance capability respectively. Hence, it gives due weight-age to the non financial parameters as well. And it will give benefit to a micro enterprise in long run.
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Re: Disagreement over some issues.
NK | Wed Apr 21 11:14:35 2010
Rating is ideally beneficial for the companies above INR 10 crore of turnover. This set of companies will have proper debt in their books, which inturn will be beneficial for rating agencies as well as the company. For companies at the Micro Enterprise (less than INR 10 crore levels) will not make any sense (as rating agencies itself are more conservative and less industry oriented), the better the balance sheet, the better they analyse. Therefore for MSME's professional rating agency touch will not make any sense. If you look at the statements given by Mr. Dubey, he is more business oriented statement, not more on the brand building or other management jargons.
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Truly Agreed
Sujit M Agrawal- 9321568621 | Tue Apr 13 09:36:37 2010
I think Mr. Rajesh Dubey has addressed some serious issues related to rating of SMEs. SMEs need to understand the concept of credit rating in broad way. They should focus on their self improvement, rather than thinking about a good rating. If they do so, their rating will automatically become good over a period of time.
SMEs need to get maximum output from a rating agency when they apply for rating. They need to interact thouroughly with research analyst and should see that they get satisfactory answers related to their problems.
Rating agency like CRISIL, which has completed rating of more than 10,000 SMEs, can really help such SMEs on the basis of experience they hold across various segments of the industry.
At the time of applying for rating, the SMEs should choose the agency with a good track record and industry experties.
The rating can also help the SMEs in improving their brand value, when they use name of the rating agency on their visiting card, letter head, website, etc. along with rating.
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Re: Truly Agreed
Ram Sharma | Thu Apr 15 08:04:37 2010
It would be really interesting to know how many SMEs with a turnover of less than Rs 50 Lacs have been rated by CRISIL.
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