Govt removes financial hurdles for SMEs with Credit Rating

Apr 14, 2016

Now, it will be easier for small and medium enterprises to get credit and easier for lenders to assess the creditworthiness of businesses before granting them loans, according to the recommendations made by a committee set up by the Ministry of Micro, Small and Medium Enterprises. The credit ratings would be uploaded to the ministry’s website with the objective to make the data more useful and accessible to both lenders and SMEs. The committee comprises various stakeholders including banks, industry associations, and rating agencies. The Performance and Credit Rating Scheme (PCRS) will be implemented through the National Small Industries Corporation (NSIC), the nodal agency selected for the purpose.

Scale for better assessment of SMEs

The rating scale has been proposed to be aligned with that generally used by banks. The proposals aim at helping financial institutions better assess creditworthiness of SMEs that want to apply for fresh loans or those seeking enhancement of their existing limits.

“These days getting credit for our operations is a big hurdle. Banks are reluctant to provide credit to us due to the track record of some enterprises. Some enterprises do become sick and insolvent over a period of time. The ministry has taken a good step. It will facilitate loans that are easy to apply and get,” said Vikram Chandra, an entrepreneur from Bathinda running a supply chain enterprise.

Win-win for enterprises and lending institutions

Enterprises stand to benefit in another way as well. The scale would enable SMEs assess their own financial strengths and operating performance, eventually leading to corrective measures. Operating performance would also help the buying departments of big corporates assess SME capabilities, thus improving the chances of SMEs going on to become vendors for those big companies. A third-party independent evaluation of SME strengths will enhance the transparency and credibility of the process.

“We would only need to get the ratings done and we would be able to approach big corporate houses for vendorship. Through this, they will also get to know how we function and what our individual capacities are,” said Shakeel Ahmad Khan, an independent entrepreneur from Kanpur, Uttar Pradesh.

Experts also say that the development would lead to trust between vendors and buyers, adding that the third-party rating will help banks give credit to SMEs at attractive rates of interest. The ratings would aid SMEs involved in global trade too and could be used in the future as a benchmark by exporters and importers.

Banks can better manage risk with the help of ratings

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 SME unit seeking credit and thus enabling them to manage their credit risk.

Reduced fee for enterprises

Of the several recommendations, companies will now be required to pay only 75% of the fee payable to a rating agency. The ratings would done by the empanelled board of rating agencies. The subsidy is aimed at helping SMEs tide over substantial credit rating charges.

Development to bridge gap between SME credit demand and finance flow

The guidelines were first issued in 2004 with the aim to facilitate credit flow to enterprises and but there was a perception that bottlenecks continued to exist, particularly with respect to the financial flow to the SMEs sector. With the government intent on going all out to create a favorable environment for startups, the development is expected to help SMEs, especially those turning sick or in need of rehabilitation.

The ministry hopes that the implementation of the recommendations will bridge the yawning gap between credit demand of SMEs and financial flow from institutions. The SME sector is one of India’s largest and is generally considered as the backbone of Indian economy, providing 45% of all manufacturing output. This sector is also critical to the generation of employment in the country. It employs around 40% of the country’s workforce and generates millions of jobs, especially at the low-skill level.

Great! You've successfully subscribed.
Great! Next, complete checkout for full access.
Welcome back! You've successfully signed in.
Success! Your account is fully activated, you now have access to all content.