Ratings help MSMEs attain greater and easier flow of credit, says Parag Patki of SMERA

MSME ratings help raise corporate governance, bring transparency and also improve the reporting standards, according to Parag Patki, CEO of SME Rating Agency of India(SMERA).

He also divulged the information that SMERA would mainly focus on SME ratings and is targeting to achieve cumulative ratings of 25,000 SME ratings this year.

What is the role that SMERA aims to play in India's SME sector?

Parag Patki: SMERA is striving to reduce information asymmetry within the sector by acting as an independent, third party, unbiased risk-opinion provider to the business ecosystem of the SME world. Considering SMERA’s completion of seven years in the business and its experience of rating over 17,000 MSMEs, SMERA is confident of becoming a bridge to plug the information gap between MSME borrowers and lenders such as banks and financial institution and enhance the credit flow to this sector. Moreover, SMERA’s rated universe will also provide comfort to the corporate sector in getting access to quality, well managed and funded pool of units. Policy advocacy is the other role that SMERA aims to play once the rating universe achieves a critical mass in the immediate future.

SMERA also plays the role of an advocator to the MSMEs on the benefits of accepting the good corporate governance practices and bringing transparency within their unit. SMERA has found that the credibility of its consistently rated clients have improved if such units have displayed improvement in successive ratings.

Kindly share the relevance of credit ratings for SMEs?

Parag Patki: The relevance of credit ratings for SMEs are mentioned as follows -

a)Concessional funding & lower collateral: Ratings facilitate greater and easier flow of credit from the banking sector to MSMEs.

b) Better market standing: Acceptance amongst lenders, trading partners (local as well overseas) and prospective customers.

c) Quicker credit decision at the lender’s level: Ratings provide comfort to the lenders thus reducing time to lending and cost of lending.

d) Better Governance: MSME ratings provide an impetus to raise corporate governance, transparency and reporting standards.

How do you think that the Indian SMEs are performing in the present global scenario?

Parag Patki: Slowdown in domestic demand coupled with weak global demand is pressuring both domestic and export oriented (SMEs which are engaged in 100% exports have been adversely impacted vis a vis SMEs having both domestic as well as overseas exposure). Also, stretched receivable cycle is further exacerbating the downward pressure on ratings. The increased financing cost and input cost (due to inflation) has exerted strain on their financial position. However, SMEs catering to domestic market are still exhibiting moderate growth.

As per SMERA, the general direction of the rating has a downward bias (% of ratings in upgrade category have continued to exhibit reducing trend even in the Q1 of FY 12-13). In FY 2010-11, around 38% of the total cases which had approached SMERA for review ratings were upgraded; however the percentage has dropped to around 21% in FY 2011-12. The data is as under:

Year	Upgrade %	Downgrade %
FY 2010-11	37.78%	10.37%
FY 2011-12	21.48%	12.50%

What are the key challenges faced by the Indian SME sector?

Parag Patki: The key challenges faced by the sector are as follows:

· High cost and terms of borrowings.

· Limited and timely access to bank loans.

· Unavailability of requisite volume of affordable skilled labour.

· Constraints on modernisation and expansion and adoption of newer technology.

· Limited bargaining power with the corporates resulting in stretched collection period and squeezed margins.

· Power shortage.

· Lack of infrastructure.

Do you feel that government policies (both Centre and state) are working in favour of the SMEs? Are they assisting these companies in alleviating the pertinent issues?

Parag Patki: Government have been taking various steps to promote the SMEs such as:

· Extending collateral free loans upto Rs 1 cr under CGTMSE scheme.

· Providing credit linked capital subsidy (CLCSS) for technology upgradation.

· Classifying loans to SMEs as priority sector to increase bank lending to the SME sector.

·SME Stock Exchange for enabling the SMEs to access the capital market.

· MSME Ministry operates a 'NSIC Performance and Credit Rating Scheme' and offers 75% rating fee subsidy for SSI units.

· Ease of bidding for government contracts for rated SME units.

· Lack of awareness is affecting the utility of these schemes.

Do you feel that ICT (information and communication technology) usage by SMEs has gone up?

Parag Patki: Yes, our communication with SMEs indicates that the usage of ICT is increasing exponentially, given the obvious reach and cost advantages that ICT bestows upon the sector.

A recent study conducted by FICCI shares some valuable insights as under-

- Almost 74% of the respondents (SMEs) have their company’s website.

- 79% of the respondents (SMEs) use ICT tools in their day to day business operations. It implies that most of the people are aware about ICT and understand its importance and therefore use ICT tools in their day to day business operations.

- 79% people who use ICT tools in their day to day business operations, maximum usage of ICT tools is done for promoting sales and marketing (79%) by different companies (SMEs), followed by finance (67%) and market research (53%). Very few companies (21%) use ICT tools in their supply chain activities.

- Out of the people who use ICT tools in their day to day business operations, maximum respondents (95%) find them beneficial in one or the other way.

What is the outlook for the SME sector in this year?

Parag Patki: In the next two-three quarters, SMERA expects sharp increase in pressure. Moreover, enhanced risk perception among banks could also lead to lower bank funding for the SMEs. From a medium to long term perspective, structural dynamics of the global slowdown will have the largest bearing on competitiveness of export oriented SMEs. Slowdown in the domestic consumption due to inflation may have a moderate effect on the growth of SMEs. The lower growth of GDP, high inflation and dull export market will have added bearing on the SME sector.

Fitch downgraded the outlook for the domestic retail sector to 'negative' from 'stable'. It has hinted at further rate cut in the future. How do you think it will impact the Indian SMEs?

Parag Patki: Textile oriented retail sector is currently facing high inventory, debt pile up and overall deterioration in the consumption due to reduction in discretionary spending. These factors will impact overall demand (due to lower demand)/ lower credit flow (bank & other lending channels)/ tighter cash flows (due to delayed payments) as the retailers tighten their belt and adopt stricter working capital management to manage their business, thus impacting the Indian SME sector.

RBI's move to leave rates unchanged for the second consecutive policy review has been criticised by India Inc. How do you think it will impact the growth of SMEs?

Parag Patki: Growth of SMEs would be impacted due to lower bank credit as a result of higher risk perception among banks and also prohibitive costs of borrowing at the SME level. This would not change due to RBI move to retain the rates for the second consecutive policy review. The costs of borrowing coupled with high raw material prices, high labour costs are affecting SME profitability. It would also affect the capex plans of SMEs and affect their overall growth. However, inflation is also hitting SMEs sector on account of increased cost of --input and labour cost and therefore regulatory action from a perspective to control uncomfortable level of inflation should be appreciated.
SMERA’s analysis also reveals that bank credit to MSME, as a percentage of total bank credit, is at a six year low of 20.6% (Source- Deployment of Gross Bank Credit by Major Sectors; RBI). This is lower than the average by around 1.2 percent (1.2 per cent translates to Rs.57,000 crs). Hence, bank funding to SMEs has reduced by over Rs 57,000 crore on a relative basis. Also, on an absolute basis MSME credit has grown by only 12 per cent (June 17, 2011 to June 29, 2012) as against overall bank credit growth of over 19 per cent for the same period.

Inflation in India eased in July to 6.87% as compared to June. Do you think it is a signal of the changing times in Indian economy?

Parag Patki: Weak infrastructure and power scenario will continue to remain as bottlenecks. Even though the inflation has eased to 6.87%, the fiscal deficit of India is widening due to continuous decline in exports and increase in oil prices, which is a dominant constituent of our imports. The weakened Rupee has also added to our woes, further pushing up import cost. The food inflation also continues to hover at the 10+% mark. With poor monsoon in India and large scale crop damage in US this year, food inflation may further go up and push the overall inflation rate. Hence, in SMERAs opinion this is still not a clear signal for changing times for our economy.

Kindly share the roadmap of SMERA for the on-going financial year 2012-13.

Parag Patki: While SMERA would primarily focus on SME ratings and is targeting to achieve cumulative ratings of 25,000 SME ratings this year, SEBI licence to rate bonds and IPOs would enable SMERA to diversify its offerings to the corporate sector too. SMERA is also keenly awaiting accreditation from RBI for Bank Loan Ratings which will open doors to the SMEs as well as corporate sector to a choice of better service as well economical pricing advantage. In addition, SMERA would continue to evolve newer products so as to cater to the requirements of bottom of the pyramid SMEs and also play an important role in financial literacy of the sector with the help of technology. Similarly, handholding SMERA rated universe to explore newer avenues of funding for growth such as: SME Exchange/ Private Equity/Risk Capital/Venture Capital will be other focus areas this year for SMERA.