The government is preparing guidelines to align the rating methodologies of rating agencies and commercial banks to minimise the difference in their judgment on the repayment capacity of micro and small enterprises (MSEs). The new strategy is also expected to reduce the chances of denial of loans to fund-starved MSEs.

The guidelines are being drafted through National Small Industries Corporation (NSIC), the entity formed under the control of ministry of micro, small and medium enterprises (MSMEs). Once the working plan is ready, it will be shared with Reserve Bank of India (RBI) and Indian Banks? Association (IBA) for approval.

At present, rating of MSEs by rating agencies is not accepted by many commercial banks, as the financial institutions are not confident of such marking. They rely more on internal rating system. But rating agencies say that banks are not capable of properly judging the repayment capacity of MSEs due to lack of time and infrastructure and as a result of this MSEs are denied loans.

Notably, loans to MSMEs rose 35.4% during 2008-09 up to February 27, sharply lower in comparison to 67.4% in the corresponding period of the previous fiscal. MSMEs have economic importance as they employ 42 million people, and contribute 9% of country?s gross domestic product and 40% of exports.

?Alignment is necessary to make the credit ratings system work for micro and small enterprises. Dual rating leads to waste of time and money. We are working towards such an alignment, but it is at a nascent stage as of now. As and when the guidelines are prepared we will talk to IBA and RBI through the ministry,? NSIC chairman and managing director HP Kumar told FE.

NSIC is the nodal agency for government?s subsidy programme called ?Performance and Credit Rating Scheme?, for which the corporation has empanelled seven rating agencies namely ICRA, ONICRA Credit Rating Agency of India, Dun & Bradsheet, CRISIL, FITCH, CARE Ratings, and SME Rating Agency of India. However, commercial banks have to work under the guidance of RBI, which has approved only four ratings agencies-ICRA, FITCH, CARE and CRISIL.

?Credit rating is necessary under the Basel II banking norms, otherwise a bank has to provide for extra risk weight. Although banks may be shying away from external rating agencies at this moment, with higher credit volume their infrastructure would come under pressure and they will have to depend on us to safeguard their capital,? ONICRA?s chief operating officer (SME business) S Ramesh said.

The banking fraternity says it is better equipped to rate the clients than the outside agencies. ?The concern is the credibility of rating agencies. If they had the ability, the present credit situation would not have arisen in the west. We have our own system of rating which is much more quicker as we know the borrower?s repayment ability and its business portfolio better,? State Bank of India?s chief manager (SME business unit) TS Oberoi said.

MSMEs say they are being made to pay the cost of this imbroglio. ?The banks don?t accept the rating done by outside agencies. Getting credit is difficult and delayed if the banks rate us through their internal system. Overall, the whole situation is not in our favour,? Federation of Indian Small and Medium Enterprises? secretary general Anil Bhardwaj said.

Road map

• National Small Industries Corporation is drafting

guidelines to make rating standards of external agencies and banks parallel

• At present, banks don?t accept external rating; say internal mechanism more reliable

• Rating agencies say higher volume need external rating

• MSMEs cry for funds; growth in bank credit was 35% in 2008-09 till Feb 2009 against 67% a year ago

• Alignment is necessary to make the credit ratings work for MSMEs

• Credit rating is necessary under the Basel II banking norms, otherwise a bank has to provide for extra risk weight