Good credit ratings allow SMEs to enjoy interest rate benefits, says Sachin Nigam of CRISIL

Given the problems SMEs face in seeking finance, approaching a credit rating agency is a good option for small companies as a good rating not only help SMEs to gain faster and cheaper credit for venture but it allows them to enjoy interest rate benefits varying between 0.25 per cent and 1.25 per cent from the financial lenders. This and many other aspects of ratings were explored by Sachin Nigam, director, SME Ratings at CRISIL in an exclusive interview.

How do CRISIL SME ratings empower SMEs and drive them to next level of growth?

Sachin Nigam: CRISIL SME ratings empower the SME through the following:

- Assisting them in getting adequate and timely credit

- Bringing in greater level of transparency and corporate governance

- Greater acceptability among customers, suppliers and investors

- Act as a self- improvement tool

The key challenges being faced by the SMEs in India is access to adequate and affordable credit recognizing the key role SMEs play, increasing availability of funding for SMEs has been at the forefront of the policy agenda. . An important element in increasing the comfort of bankers in lending to SMEs is the availability of high quality analysis and independent opinions on SMEs. And that is exactly what CRISIL SME ratings seek to provide. A credit rating provides an objective and high-quality assessment by a credible third party about the SME’s financial and performance capabilities. This helps lending organisations make a more informed choice.

We believe rating is a significant step towards empowering SMEs, increasing their access to funds and at the same time driving the entire SME eco system towards higher levels of transparency and corporate governance. We have received strong feedback from all stakeholders including customers, bankers and industry associations that stand testimony to our belief.

Another advantage of getting rated is that highly rated SMEs get the advantage of interest rate reduction from the Banks. There is wide acceptability of ratings among the bankers and in what is unprecedented in India, more than 20 banks provide interest rate concessions ranging from 0.25% to 1.25% to rated entities depending on their ratings.

A good rating also gives the business more credibility. Many large corporates and government entities have integrated ratings in their vendor/dealer evaluation process. And often the prospect of evaluation enables SMEs to dispassionately examine their own strengths and weaknesses and address issues to strengthen their operations.

Rated SMEs/SSIs get listed free of cost on CRISIL’s RatingScan, a publication used as a reference for lending decisions by many banks, and on the CRISIL website. The company’s name is also featured on CRISIL SME Connect, the monthly newsletter sent out to more than 3,000 bankers and 12,000 companies across India.

Since the inception of ratings concept for the SME sector, how many SMEs has CRISIL rated?

Sachin Nigam: Since CRISIL pioneered SME ratings in India in 2005, we have successfully completed more than 32,000 SME Ratings in a span of just seven years. This is the largest number of SMEs rated anywhere in the world.

What are the measures CRISIL adopts to popularise third party ratings amongst SME units?

Sachin Nigam: Generating awareness about the benefits of rating is of vital importance in the overall quest to bring greater transparency and corporate governance in the sector. CRISIL does these by organising seminars in collaboration with bankers and industry association for smaller enterprises across the country on the process and benefits of ratings.

How do you categorize SMEs for fair evaluation amongst peers?

Sachin Nigam: The SME sector has to be treated differently, because the drivers of credit quality for smaller enterprises and the issues faced by them are different from those applicable to large companies. Therefore, CRISIL has developed a unique two-dimensional scale for SMEs, where parameters for information requirement have been simplified and which can measure both performance capability as well as financial strength. Additionally, our whole SME Rating system is affordable and tailor-made for the sector.

Is it as easier to get reliable financial information about SMEs as in case of big players?

Sachin Nigam: Shortage of reliable financial and other information is a continuing challenge when it comes to rating SMEs. However, having rated more than 32,000 SMEs, CRISIL is able to bridge this information gap with a 360-degree evaluation approach. We don’t just go by the audit reports and CA certification but also mine alternate sources of information, including the firm’s bankers, suppliers and customers.

Each has its benefits. Bankers help us verify details of the working of the corporate account, the company’s actual sales/receivables position and whether it has been honouring its financial commitments. Information about the market position and operating efficiency can be cross-checked by meeting suppliers and discussing the firm’s purchases and sales, order book position, and payments terms. Our associates also visit the facilities of the company to determine whether the company has been truthful in describing its infrastructure, people strength etc.

All these factors, along with our experience of rating more than 32,000 SMEs, help us in bridging the information gap, which we face while rating these SMEs.

It is often seen that SMEs have to undergo fresh ratings assessment by banks when they apply for loans, despite ratings done by renowned credit rating agencies. What is the basic reason behind this?

Sachin Nigam: Banking being a highly-regulated sector, banks have stringent norms for day-to-day functioning. But this does not eliminate the need for rating agencies like ours. In fact, our ratings provide banks with an objective, credible and unbiased assessment of an organisation’s creditworthiness. This is borne out by the facts. Our ratings are used as a key ingredient by more than 40 banks in their decision-making process. And as mentioned earlier, banks give interest rate benefits varying between 0.25 per cent and 1.25 per cent to SMEs that have good credit ratings.

In its monetary policy review on Sept 17, Reserve Bank of India (RBI) kept repo rates unchanged while CRR rates were slashed 25 bps to 4.50%. What is your opinion? Will the additional liquidity in the market help SMEs and manufacturing companies who are looking for credit flow?

Sachin Nigam: The RBI’s move to cut CRR rates will introduce additional liquidity of Rs. 17,000 crore into the banking system. This will unlock cheaper credit for the industry at large, including for smaller enterprises, in the short-to-medium term. SMEs rated highly by CRISIL already enjoy lower loan interest rates from 20 banks.

Please share your roadmap for the current fiscal (2012-13).

Sachin Nigam: We will continue to take the message of ratings to all parts of the country. It will be our endeavor to make a vital difference to the SMEs by facilitating the flow of funds to the sector and empower the SMEs to take next steps in their journey to become a large corporate.