Rating game picks up pace

Written by Simran Arora | Updated: Nov 22 2009, 03:50am hrs
Small and medium enterprises in the country are changing their way of functioning by getting themselves rated, which is helping them to access bank credit faster and at favourable interest rates.

In fact, according to National Small Industries Corporation (Nsic), out of the 16,000 companies that have applied for ratings to various agencies like Crisil, Samera, Fitch and Dun and Bradstreet, about 15,000 units have already been awarded ratings. The growing popularity shows in numbers. In 2005-06, only 671 companies got rated and in the first six months of this financial year it moved up to 3,487 enterprises. Engineering, textile and auto component companies in western and southern states are taking the lead in getting themselves rated.

Says Parag Patki, chief executive officer, SME Rating Agency (Smera), The rating provides various benefits like better terms of financing, favourable interest rates, self improvement tools, better marketability and access to wider sources of finance. Last year, the company rated 1,750 units and it plans to double the number this financial year.

The rating process was started by Nsic in consultation with credit rating agencies and Indian Banks Association and they together formulated a Performance & Credit Rating Scheme for Micro & Small Enterprises. The scheme was approved by the Ministry of MSME in 2004 and Nsic was appointed as a nodal agency to implement the scheme.

Nsic empanelled various credit rating agencies like Care, Crisil, Dun & Bradstreet, Fitch, Icra, Onicra and Smera, to conduct the rating of interested micro and small enterprises under the scheme. While the criteria of finalisation is left to the individual rating agencies, the symbols and the definitions for indicating the risk score has been evolved on uniform basis for implementation by all rating agencies. The scheme was formally launched in April, 2005. The total number of small and medium enterprises in the country is 26.1 million with 24.6 million unregistered and 1.5 million registered units.

HP Kumar, chairman and managing director, Nsic, explains that units that operate a B2B business model normally opt for a credit rating. They are the ones that understand that the intangible gains of rating far outweigh the immediate tangible gains. The expectation from rating is to get a proper health check in the form of a SWOT analysis.

The rating exercise, when seen in the light of a self-improvement tool, works as a starting point in improving the performance and market standing of an entity. Subsequent renewal ratings indicate the steps that the company has undertaken to improve itself.

Rajesh Dubey, executive director, SME Ratings, Icra Online Limited, says, The objective of the rating exercise is to get an evaluation done to assess the areas of weakness, which may threaten your market share and also promote your strengths in business growth efforts. The assessment, which is done from a neutral perspective, often provides additional inputs, which might have been normally overlooked by the promoter and his managers.

Rajiv Chawla, president, Faridabad Small Industries Association, says companies in garments export are now increasingly opting for ratings to ramp up their capacities. Financial and non-financial parameters are being used for rating a unit.

Since small and medium enterprises are essentially about the promoters ability to manage his unit, rating agencies lay equal stress on evaluating promoters background, education, skills and networking ability to arrive at rating a unit.

Rating agencies also consider all other relevant factors that have a bearing on a units future cash generation. Such factors include industry characteristics, com-petitive position of the unit, operating efficiency, management quality, succession plan, relationship with employees, commitment to new projects, funding policies, track record with lenders, and trade relations with suppliers and customers.

The rating business is set to get more popular since the Prime Ministers Office had already constituted a task force to look into the problems faced by SMEs, and suggest measures.