The basic SME rating model will remain the same but SMERA will make certain adjustments with respect to benchmarks such as the definition of MSMEs, industry classification amongst others which are specific to each country.
Ease of Doing Business for MSMEs: Small and medium enterprise (SME) focused rating agency SMERA Ratings, part of Acuite Group, is taking its SME rating business to South Asian countries by the end of October 2021. “Countries where English is one of the business languages such as Indonesia, Thailand, Malaysia, Bangladesh, and the Philippines are being considered,” Sankar Chakraborti, Chairman, SMERA Ratings and Group CEO, Acuité told Financial Express Online.
He added that the basic rating model will remain the same but they will make certain adjustments with respect to benchmarks (such as the definition of MSMEs, industry classification, etc.). “The fundamentals of SME business in these South Asian countries are similar; they are all export oriented, they suffer from the same problem of lack of funding, so the same model can be easily replicated,” he said.
Credit ratings play an important role in making affordable funding accessible to SMEs as they bridge the information asymmetry between the external creditors and the SMEs themselves. However, assessing the credit risk of SMEs has always been a challenge due to the lack of information around the firm’s financial data and unviability of the SME rating business itself since it is a low-margin business.
“Rating SMEs is a volume game and just like any low-margin business reaching global scale is critical to do meaningful business,” said Chakraborti on the rationale of taking the business out of India.
SMERA is solving the problem of scale using technology to limit human intervention and keep operational costs in check. For instance, their system can automatically pull information about the firm’s relative competitiveness with respect to its peers.
To put this in perspective, Chakraborti explained, if an analyst does five rating reports a month using the universally applicable bond rating method, an analyst for rating SME can complete 25 reports during that time frame. However, bond rating is for large enterprises and doesn’t do justice to small businesses. For SME ratings, SMERA has a customised rating scale of eight points instead of the scale of 20 used in bond ratings.
Currently, the company determines the creditworthiness of 150-250 SMEs every month. These requests come from banks who want to lend to SMEs and also large corporates that offer financial facilities to their MSME vendors and face a significant credit exposure.
On the business of ratings for small firms, Chakraborti said they are now working on a model to rate companies without balance sheet, relying on their cash flow statements and GST returns. “We believe that bank loan ratings and bond ratings are relevant when the loan is at least Rs 15 to 20 crores. Below that it is probably better to look at the SME rating framework and our job is to enable banks to lend to all kinds of SMEs profitably,” he said.
SMERA was earlier set up as a joint venture (JV) between the Small Industries Development Bank of India (SIDBI) and Dun & Bradstreet. It changed its name to Acuite Group in 2018 to position itself as a full-service rating agency. Currently, SMERA is a wholly-owned subsidiary of Acuite.