credit rating of msmes
Post on 30-May-2018
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Group 4CREDIT RATING OF MSMEs
Arihant JainAlpana TahlaniKomal BohraMayuri AgarwalParv Verma
Priya PhakkeTreesa JosephVarun Gupta
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OVERVIEW OF THE CASENorms for rating MSMEs on anvil
Guidelines to align the rating methodologies of ratingagencies and commercial banks
Minimize the difference in the judgment on the repaymentcapacity of MSME
Guidelines being drafted through NSIC and the entityformed under the control of ministry of MSMEs
Rating of MSEs by rating agencies is not accepted by manycommercial banks and financial institution (not confident)
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But rating agencies says that banks are not capable ofproperly judging the repayment capacity
Alignment is necessary to make credit rating system workMSMEs and NSIC is working towards it
Credit rating is necessary under Basel 2
The concern for banking fraternity is the credibility ofrating agencies
The whole situation is not in favor of MSMEs
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THE WAY FORWARDRatings typically embody an assessment of the risk of loss due to
failure by given borrower to pay as promised, based on considerationof relevant counter party and facility characteristics.
Banks rating architecture is different from the rating agencies
Banks can take advantage of the Credit Appraisal and Rating Tool(CART) as well as a Risk Assessment Model (RAM) and acomprehensive rating model for MSMEs, developed by SIDBI orconsider the ratings given by reputed credit rating agencies asinitiated by NSIC and whenever appropriate, structure the interestrates in tune with these ratings.
Take the help of external experts who understand the banks riskculture and rely on SMERA under compulsive Basel II stipulations forSME rating.
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FOCUS & RELEVANCE OF
THE CASECredit rating for the SME sector
BASEL II norms
Banks reaction on external rating
Demand for Credit rating
Funds at lower rate
Fund starved sector
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PRESENT SCENARIOMore than 16000 MSMEs units have filed applications
with various credit rating agencies till Sept 2009.
The number of units awarded credit ratings increasedto 5011 in 2008-09 from 671 in 2005-06.
NSIC started a scheme called Performance and CreditRating Scheme for Micro and Small Enterprises.
MSME industry is formulating guidelines to make thecredit rating of MSME widely acceptable.
Alignment of two methodologies will reduce thepossibilities of denial of loans to MSMEs.
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OF CREDIT RATING
AGENCIESWith each Bank/FI having separated rating processes
and disclosures requirements for the purpose ofdisbursing loans, the SMEs were finding themselvesspending significant time, effort and money while
approaching different banks/ PIs for their creditrequirements.
So number of initiatives were taken by FIs and otherrelated Governmental Organizations
The basic objective of these initiatives was toprovide comprehensive assessment of the overallcondition of SME to reflect its creditworthiness,adjudged in relation to other SMEs.
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INITIATIVES.
Benefits for SMEs:
It enables best SMEs to better differentiate themselvesamong other SMEs
Objective assessment by credible and neutral third partyFaster access to funding at appropriate interest rate and
other terms
Credibility with business partners customers, suppliersand collaborators
A tool for self improvement gives a comparativebenchmark
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Benefits for Banks/ FIs:
Ready available third party opinion
Rating report provide relevant information for loanapproval
Facilitates lending decision quantum of loan, price,margin
Benefits to SME Sector:
Will improve credit inflow, transparency, discipline andbest practices
Will reduce information asymmetry
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BENEFITS OF CREDIT
RATINGRapid growth of the SME sector
SMEs can leverage their ratings
Facilitates faster processing of credit facilities
To enhance their credibility with other counterparties
Getting bank funds at a slightly lower rate of interest
Rating exercise can help SMEs understand better
Greater transparency,
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MISCONCEPTIONS Assumption that SMEs will only get low ratings
because of their smaller size.
Will SMEs be able to provide quality, reliable
information required for a credit ratingexercise?
Fees of rating agencies unaffordable.
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It takes into account the financial condition andseveral qualitative factors that have bearing on
credit worthiness of the SME
SMERA Rating consists of 2 parts, a CompositeAppraisal/Condition indicator and a size indicator
SMERA Rating categorizes SMEs based on size,so as to enable fair evaluation of each SMEamongst its peers
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THANK YOU
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