By TIOL News Service

NEW DELHI, AUG 24, 2016: MSME acceptance of ratings must be encouraged as such ratings bring significant benefits to small enterprises as well as funding institutions, stressed a report ‘Stairway to Funding: Improving MSME Access to Institutional Credit through Ratings'. The report was released by Dr S S Mundra, Deputy Governor, Reserve Bank of India, at the 2nd National Conference on MSME Funding organized by the Confederation of Indian Industry (CII) on 23rd August 2016 in New Delhi.

“Credit ratings can boost financial discipline, disclosure and governance practices among MSMEs, thereby reducing lending risks. Good ratings enhance the acceptability of the rated units in the market and provide them access to quicker and cheaper credit,” said Mr Shreekant Somany, Chairman, CII National MSME Council.

Ratings have been accepted by just 0.25% of MSMEs in India due to low level of awareness, according to the CII-Crisil report. The report recommends action points to increase acceptability of ratings:

· Stronger incentives should be offered in addition to funding for MSME to undertake rating

· Greater transparency in information sharing should be mandated for MSME

· Trade bodies should popularize MSME ratings with awareness sessions

· MSME ratings should be mandatory for banks considering loans

· Banks should encourage their unrated MSME clients to obtain ratings

The report also highlights steps that MSME should undertake to improve ratings, including more comprehensive information, capacity building, deepening product portfolios, and improving compliance and quality controls, among others.

According to the report, credit ratings provide several tangible and intangible benefits to various stakeholders. Apart from easier access to finance at lower costs, ratings benchmark MSMEs and can also be a useful marketing tool. The challenge lies in bringing in uniformity in the credit rating parameters being used by various ratings agencies, launching outreach initiatives, and educating the SME sector on the benefits of ratings.

The report also highlights the benefits of credit ratings for banks and lending agencies. These include better risk assessment, due diligence by third parties, more efficient monitoring and assessment of their credit portfolios, improvement in the quality of assets, etc.

‘Stairway to Funding: Improving MSME Access to Institutional Credit through Ratings' also outlines the evolution of various ratings products in India, and some best practices adopted by high rated MSMEs. The report also provides an overview of the Performance & Credit Rating Scheme (PCRS) for Micro & Small Enterprises launched by the Ministry of Micro, Small and Medium Enterprises in 2005 and being implemented by the National Small Industries Corporation (NSIC).

Poor access to institutional funding is a pervasive concern for MSMEs. This can be attributed to a melange of factors such as lack of reliable background information, low awareness about standard accounting practices, delayed payments, high risk perception of banks and other lending institutions, difficulty in credit risk assessment of MSMEs due to absence of information on historical cash flows, credit track record and tools to assess credit risk and creditworthiness of these enterprises, etc.

According to the report, several distinguishing features and best practices are responsible for the success of high rated MSMEs. These include presence of experienced promoters, a reliable, efficient and empowered second-tier management with significant decision making authority, a diversified product and customer base, healthy stakeholder relationships, deployment of latest technology, access to sound infrastructural facilities, strong accounting and reporting standards, regular quality and performance assessments.