Banks can focus on SMEs: Study

A Crisil study reveals that the country's large number of creditworthy small and medium enterprises (SME) present banks with huge untapped business potential. SME present a strong financial profile, according to the study conducted by Crisil, which covered 32,000 SMEs and over 25,000 large companies.

Around 50 per cent of SMEs have a debt-equity ratio less than 0.34 and an interest cover of more than 2.24 times while in the case of larger companies, the debt-equity ratio is 0.73 and interest cover is 2.63 times.

The reason for the low indebtedness of SMEs could be the non-availability of finance at attractive rates, owing to a wrong notion that the sector poses a high credit risk, according to Crisil.

There is a wide difference in the financial profiles of the top 50 per cent and the bottom 25 per cent of SMEs, Crisil said.

Financially strong SMEs can reap high benefits by validating their superior creditworthiness through ratings.

"This is the largest such comparative study conducted in the Indian context, and the results are an eye-opener," said Roopa Kudva, executive director and chief rating officer.

"The study provides compelling evidence that there are a large number of creditworthy SMEs. For banks, the sector thus represents tremendous untapped business potential," Kudva said.

The study also reveals the weaker profitability of SMEs compared with large companies. Operating margin for the average SME was 8.7 per cent, compared with 15.6 per cent for the average large company.

However, the lower profitability of an SME is offset by a much lower debt-equity ratio.

Further, financial and credit parameters drop sharply for the bottom 25 per cent of SMEs compared with the bottom 25 per cent of the large companies included in the study.