‘Rating helps better access to credit for SMEs'

Easier access to bank credit, at interest rates that are 0.25-1.25 percentage lower than normal rates – this is the benefit that small and medium enterprises (SMEs) enjoy when they get themselves rated by rating agencies, says Crisil which recently completed its 25000th SME rating. Business Line spoke to Mr Sachin Nigam, Director, SME Ratings at Crisil, to gauge trends in the SME sector and the advantages accruing to such units from credit ratings.

Excerpts:

What are the benefits for SMEs who get themselves rated by a third party like Crisil?

Banks offer interest rate concessions between 0.25-1.25 per cent to SMEs that enjoy higher credit ratings. The reason that banks do so is because they are able to price your product to the risk that is associated.

There are two benefits from securing a rating: one is the interest rate benefit; two and a very important benefit is that the bankers are then willing to increase the credit limits for the SME. This has a compounding effect on his turnover.

Third, we have customers in around 450 cities and most of these SMEs cater to markets in and around the city. The rating allows them to expand their market base, get new contracts from export markets and so on. These do not get quantified easily but are very tangible benefits.

So we have had customers who write to us saying that the rating helped them increase their bank guarantees from say Rs 5 crore to Rs 10 crore which in turn helped increase their turnover from Rs 15 crore to Rs 40 crore. They are able to get new customers or apply for government tenders by attaching the credit rating information.

A lot of banks use this as part of their credit-decision process. It enhances the banks comfort factor while sanctioning or increasing credit limits.

If the benefits are so tangible then why do 60 per cent of your clients not come back for renewing their ratings?

Forty per cent (who have renewed ratings) is a big number. There could be reasons for clients not seeking renewals. Not all the companies who get rated get good ratings. Or some of them may not really be ambitious. But 55 per cent of the clients see value in one form or the other. The 40 per cent who come back, come back although it is not a regulatory requirement.

25,000 SMEs is a lot of companies to track and rate. What are the resources you have to do the rating and do you review the ratings?

These companies are getting rated under the NSIC (National Small Industries Corporation) scheme. It is the administrating body.

The rating, as per this scheme, is valid only for one year. And the subsidy that the Government of India provides is for the first-year. After that as the rating comes to a close, we get in touch with customers and ask them whether they would like to be rated by us again.

We have an in-house centralised dedicated team because you cannot apply the same yardsticks that you apply to large companies to SMEs as well. We have devised a scale which is specific to SMEs.

What are your observations on the credit profile of SMEs especially in the current year where liquidity has been tight?

One of the things that we found through analysis was the impact that the increase in interest rate has on the SMEs' bottom line. Our analysis shows that for every one per cent increase in interest rates for SMEs, the impact is 15 per cent on their bottom line. And on an average you would have some companies or certain industries having certain level of return on capital employed, who would be having 10 per cent impact but in other cases it the impact can be as high as 25 per cent.

A couple of things have contributed to our success. One, we have specific rating scales for SMEs and two affordability aspects. For as low as Rs 8,000, SMEs can get themselves rated. Our requirements too are simplified. You don't go about asking 10,000 things from an SME.

Have SMEs you have rated faced slippages in their loan repayments? What is their record?

Only bankers can answer that. But having said that, companies that have been highly rated by us have had minimal default when they come to us for renewal. If we had seen such default, the ratings would straightaway have slipped considerably.

You should also note that in the normal corporate space, your rating remains valid till the time the instrument remains valid. Hence companies often come back for surveillance or review every year.

Whereas, with SMEs, the rating is valid only for a year. If the customer sees value, he comes back to us. So for us to make that judgment whether there is a downgrade is tough. We may have a new set of customers come in every year.

Are SMEs able to raise equity capital to scale up? Or do they end up depending on debt?

One of the things that we struggle with today is the level of information in the sector. That starts from financial information and so on. I am unable to answer your question on the basis of data. But yes the fact of the matter is, the biggest challenge in the sector is availability of finance.

And if an SME does not get finance from sources such as banks, they typically tend to fall back on debt either from the promoter's own savings or borrowings from family and friends or sometimes private equity. But for a first generation entrepreneur his own equity contribution is not high. How much can he put in from his side?

The RBI's data on credit suggest single-digit growth in flows to SMEs this fiscal. How bad is the liquidity crunch for SMEs?

In a slowdown or crunch situation, there is always a flight of capital to avenues where there is perceived safety. That could be one of the reasons for this. It is like people going for fixed deposits when stock markets are volatile. There are lot of answers that one can intuitively think of. The problem is the lack of data.

Have SMEs been resilient in the current slowdown?

There has been an overall slowdown in the economy and SMEs as a sector have been hit too. See, the cost of manufacturing is very high for an SME. So 70-75 per cent goes into meeting the cost of manufacturing.

On the other hand, interest rates too have moved up. Delayed payments also have an impact. One study we did showed that SMEs could improve their profits by 15 per cent if their clients made timely payments.

Today, we do see a change of mindset. A lot of vendors realise that SMEs may be small suppliers but even a small component is not supplied on time or there are quality issues, the vendor's' own output gets affected. So they are also starting to support through vendor financing and so on.