 "Perfomance and credit rating for MSMEs in collaboration with IBA")
Close on the heels of the bankruptcy law reforms announced in the recent budget, the Ministry of Micro, Small and Medium Enterprises (MSME) is implementing a scheme for performance and credit rating of MSMEs.
This proposal has been worked out in collaboration with Indian Banks’ Association and is called “Performance and Credit Rating Scheme”.
The objective of this proposal is to provide a trusted third party opinion on the capabilities and creditworthiness of the MSMEs and to create awareness amongst them about the strengths and weakness of their existing operations.
Officials explained that getting finance for MSME sector has become a big bottleneck as often banks and financial institutions are wary of their track record. Sometime, there is none and going by MSMEs turning sick, the ministry has devised this scheme to facilitate easy financing.
Rating under the scheme is being carried out through empanelled rating agencies and rating fee payable by the micro & small enterprises is subsidized for the first year only. The National Small Industries Corporation (NSIC) has been appointed the nodal agency for implementation of this scheme through empanelled agencies.
They explained that besides third party rating, such credit rating will help in the availability of credit at attractive interest, recognition in global trade, prompt sanctions of credit from banks and Financial Institutions, subsidized rating fee structure for SSIs, facilitate vendors/buyers in capability and capacity assessment of SSIs and enable SSIs to ascertain the strengths and weaknesses of their existing operations and take corrective measures.
On the other hand, the banks and financial institutions also stand to gain. One of the major benefits to banks and financial institutions is the availability of an independent evaluation of the strength and weaknesses of an SSI unit seeking credit and thereby enabling banks and financial institutions manage their credit risk.
Recently a RBI report suggested that even through the situation differs among countries and individual businesses; the financing gap for SMEs in the developing country has a few well-accepted causes. These include information asymmetries, higher risks, sizeable transaction costs and a lack of adequate collateral.
Finally, there are a number of "demand side" considerations that deserve more attention. Besides, three factors play a considerable role in perpetuating the MSME financing gap like poor quality of projects seeking funding, the inability of MSMEs to make the best possible use of available resources of funding and the negative attitude displayed by MSMEs towards equity financing.
As per the report, there is no authentic data available about the SME financing gaps. A study by the IFC and McKinsey and Company (McKinsey) suggests that there are close to 365-445 million micro, small, and medium enterprises in emerging markets of which 25-30 million are formal SMEs and 55-70 million are formal micro enterprises, while the rest (285-345 million) are informal enterprises.
According to the same study, close to 45 to 55% of the formal SMEs (11-17 million) in the emerging markets do not have access to formal institutional loans or overdrafts despite a need for one. The finance gap is far bigger when considering the micro and informal enterprises; 65-72% of all MSMEs (240-315 million) in emerging markets lack access to credit.
The size of the finance gap varies widely across regions and is particularly daunting in Asia and Africa. Some studies about SMEs in India have reported that as high as 93% of their financing needs are met by internal and informal sources, suggested this study.
This proposal has been worked out in collaboration with Indian Banks’ Association and is called “Performance and Credit Rating Scheme”.
The objective of this proposal is to provide a trusted third party opinion on the capabilities and creditworthiness of the MSMEs and to create awareness amongst them about the strengths and weakness of their existing operations.
Officials explained that getting finance for MSME sector has become a big bottleneck as often banks and financial institutions are wary of their track record. Sometime, there is none and going by MSMEs turning sick, the ministry has devised this scheme to facilitate easy financing.
Rating under the scheme is being carried out through empanelled rating agencies and rating fee payable by the micro & small enterprises is subsidized for the first year only. The National Small Industries Corporation (NSIC) has been appointed the nodal agency for implementation of this scheme through empanelled agencies.
They explained that besides third party rating, such credit rating will help in the availability of credit at attractive interest, recognition in global trade, prompt sanctions of credit from banks and Financial Institutions, subsidized rating fee structure for SSIs, facilitate vendors/buyers in capability and capacity assessment of SSIs and enable SSIs to ascertain the strengths and weaknesses of their existing operations and take corrective measures.
On the other hand, the banks and financial institutions also stand to gain. One of the major benefits to banks and financial institutions is the availability of an independent evaluation of the strength and weaknesses of an SSI unit seeking credit and thereby enabling banks and financial institutions manage their credit risk.
Recently a RBI report suggested that even through the situation differs among countries and individual businesses; the financing gap for SMEs in the developing country has a few well-accepted causes. These include information asymmetries, higher risks, sizeable transaction costs and a lack of adequate collateral.
Finally, there are a number of "demand side" considerations that deserve more attention. Besides, three factors play a considerable role in perpetuating the MSME financing gap like poor quality of projects seeking funding, the inability of MSMEs to make the best possible use of available resources of funding and the negative attitude displayed by MSMEs towards equity financing.
As per the report, there is no authentic data available about the SME financing gaps. A study by the IFC and McKinsey and Company (McKinsey) suggests that there are close to 365-445 million micro, small, and medium enterprises in emerging markets of which 25-30 million are formal SMEs and 55-70 million are formal micro enterprises, while the rest (285-345 million) are informal enterprises.
According to the same study, close to 45 to 55% of the formal SMEs (11-17 million) in the emerging markets do not have access to formal institutional loans or overdrafts despite a need for one. The finance gap is far bigger when considering the micro and informal enterprises; 65-72% of all MSMEs (240-315 million) in emerging markets lack access to credit.
The size of the finance gap varies widely across regions and is particularly daunting in Asia and Africa. Some studies about SMEs in India have reported that as high as 93% of their financing needs are met by internal and informal sources, suggested this study.