Republished with permission from CRISIL
(Republished with permission from CRISIL - © 1997 CRISIL Limited - All Rights Reserved)
Credit ratings will benefit the SME sector
Over the years, the Indian financial system has come to regard credit ratings as an integral part of the framework for credit and investment decisions relating to larger enterprises. Today, as the banking sector increasingly focuses on lending and providing other financial services to the small and medium enterprises (SME) sector, ratings can play the same pivotal role as they do for larger enterprises. Ratings can make SMEs’ access to financial services more efficient by providing benchmarks and improving transparency. Independent agency ratings for SMEs, based on high standards of analytical rigour, can provide greater confidence to lenders, and consequently broaden the range of financial resources available to SMEs.
Benefits for lenders and SMEs
The rapid growth of the SME sector creates exciting lending opportunities for banks and financial institutions. A credit rating takes a significant chunk of the perceived uncertainty out of their lending decisions, and reduces time and transaction costs in the system. The Indian rating industry has established its credibility in providing in-depth and unbiased analysis; ratings are therefore highly respected by lenders.
SMEs can leverage their ratings for negotiating better borrowing rates and strengthening their relationships with bankers. Ratings can also facilitate faster processing of credit facilities, as rating reports provide most of the information banks need for approving loans. Further, SMEs can use ratings to enhance their credibility with other counterparties too, such as technology providers, suppliers, and customers.
Benefits for the sector as a whole
For the SME sector as a whole, ratings can provide an important impetus in raising standards through better financial discipline, disclosure and governance practices. Surveys among larger enterprises clearly show that managements feel ratings have provided value that goes well beyond the rating symbol. In the SME sector too, ratings can be an important feedback tool for managements. An interactive rating process helps managements gain unique perspectives on business and financial issues and on best practices, from rating experts who have in-depth sector knowledge and understanding of risk. A rating exercise can help SMEs better understand what initiatives they need to take to improve their operating and financial positions. Additionally, as the number of rated players in the SME sector increases, there will be greater transparency, as more and more information is demanded and made available.
SME ratings -- a viable proposition
There are certain misconceptions about SME credit ratings. Firstly, lenders and investors often assume that SMEs will only get low ratings because of their smaller size. At CRISIL, we recently had an opportunity to analyse over 5000 SMEs. Our analysis shows that there were a healthy number of companies with considerable business strengths underpinned by the leadership of first generation entrepreneurs who had built strong brands and demonstrated the ability to withstand competition, including from large global players. The combination of business and management strength indicates that there will be several players in the sector with strong credit profiles. Several large and highly successful companies today, were SMEs only a decade ago. Sun Pharma Industries, Moser Baer India, Satyam Computer Services, Marico Industries and Maharashtra Seamless are some examples. Rating agencies are forward-looking in their analysis, and expectations are built into ratings.
Secondly there are several questions on information risk – will SMEs be able to provide quality, reliable information required for a credit rating exercise? Our interaction with SMEs has revealed that most players are willing to share reliable financial and operational information for a credit rating, as they see the tangible benefits that ratings provide. Many SMEs enjoy business relationships with large domestic and global companies, and hence already have a track record of maintaining and providing high-quality business and financial information.
The third misconception is that SMEs will find fees of rating agencies unaffordable. In its efforts to develop the credit markets, the ratings industry in India has never allowed fees to be a constraint. In fact the rating fee is by far the lowest element of the cost of raising funds, and there is no reason why this should not be so for the SME sector as well. The National Small Industries Corporation has recently launched an attractive scheme for Small Scale Industries, providing a subsidy of as much as 75% of the rating fees.
Clearly, ratings have the potential to transform the way SMEs are integrated into the financial system. But rating agencies must recognise the special initiatives they will need to take in this regard. They need to launch outreach initiatives, educating the SME sector on the benefits of ratings. Rating agencies also need to have specialised teams and analytical tools customised for the SME sector.
Source: CRISIL Limited
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