Crisil pioneered the concept of ratings for the SME sector in India and launched it in 2005.In just seven years it has completed more than 30,000 SME ratings. Sachin Nigam, Senior Director, Crisil Ratings, tells Rajiv Shirali in an e-mail interview that many rated SMEs have used the ratings as a stepping stone to move to the level of mid-sized companies.
How long has Crisil been rating SMEs, and what was the thinking behind the launch of this product?
We have always been focused on making markets function better and our innovations have been geared towards that. The concept of SME Ratings took shape in 2005 when we took a closer look at the sector and realised that it was faced with fundamental problems such as information asymmetry which eventually manifested itself in lack of adequate finance to propel the growth of the sector. Our endeavour was to provide credible third party opinion on the entities which would bridge this information asymmetry.
So our ratings have helped both SMEs as well as financial institutions. On the one hand, banks and institutional investors had a better view of small companies and their financials, which helped them make better credit decisions, while SMEs too benefited, as they were able to attract funding from newer sources. Over the years, a lot of these companies have used the ratings as a stepping stone to move to the next level of a mid-size company.
What do SMEs gain by getting themselves rated?
An important element in increasing the comfort of bankers in lending to SMEs is the availability of high-quality analysis and independent opinion on SMEs. And that is exactly what Crisil SME ratings seek to provide. We believe ratings are a significant step towards empowering SMEs, increasing their access to funds, and at the same time, driving the entire SME ecosystem towards higher levels of transparency and corporate governance. Our data and analysis show that ratings bring four distinctive benefits to SMEs.
First, they have helped SMEs access funds because of two key reasons: Ratings enhance the confidence of bankers and provide interest rate reductions to highly rated SMEs. More than 20 banks provide interest rate concessions ranging from 0.25 per cent to 1.25 per cent to rated entities, depending on their ratings.
Second, they give SMEs greater acceptability among customers, suppliers as well as other investors. Third, the feedback and insights gained by SMEs during the rating process helps them look at their operations more dispassionately, which has proved to be a valuable tool for self-improvement.
Lastly, rated SMEs/SSIs get a free listing on Crisil’s RatingScan, a publication that is used as a reference for lending decisions by many banks, and on the Crisil website.
How do you overcome the problem of scarcity of reliable financial information about SMEs?
To tackle this challenge, we use various surrogates like feedback from bankers, suppliers and customers. In essence, our rating is a 360- degree evaluation. For instance, the feedback from bankers provides us with details about the working of the bank accounts of the company. This helps us counter-check the details provided by the entity, like the total sales/receivable position or whether they are in line with the credits in the accounts.
Similarly, feedback from suppliers and customers provides details about purchases and sales, order book positions and payments terms, which helps us check information like the company’s market position and operating efficiency.
SMEs complain that when they apply for bank loans, banks like to carry out their own ratings, despite ratings done by agencies like Crisil. What is the solution to this?
Like any regulated sector, banks, too, have to follow their stringent norms for day-to-day functioning. However, an independent assessment by credit rating agencies ensures that the bank gets a third party opinion which is credible, objective and unbiased. Currently, more than 40 banks use our ratings as a key ingredient to their decision-making process and offer interest rate concessions to SMEs. Additionally, as I have already mentioned earlier, SMEs with a good rating get interest rate benefits varying between 0.25 per cent and 1.25 per cent.
