Credit Rating is an estimate of the credit worthiness of an individual, corporation, or a country. It is an opinion made by credit evaluators of a borrowers potential to repay debt. Every rating grade comes with its probability of default, which in turn assists investor/lender to take informed investment decision. Rating is arrived after considering various financial, non-financial parameters, past credit history and future outlook. There are various types of ratings viz. Issuer Rating/ Obligor Rating, Bank loan Rating, Issue based Ratings, Project Rating etc. Based on type of borrower/issuer, Ratings can be classified as Individual Rating, Corporate Rating, Bank/Financial Institutions Rating, SME Rating, MFI Rating etc. SMERA offering: 1. SMERA Credit Ratings provides a comprehensive and independent third-party evaluation of the overall condition of the applicant. Currently, SMERA offers Obligor Ratings which takes into account the financial and non-financial factors that have bearing on the credit worthiness of the applicant. At present, SMERA offers following products: o o o o o 3. MSME Rating Greenfield & Brownfield Grading Microfinance Institutions (MFI) Rating Green Rating Risk Management Solutions
SMERA Rating endeavors to enhance the market standing of the applicant amongst lenders, trading partners and prospective customers.
1) Wide Recognition and Acceptance Considering that different banks deploy customized rating processes and disclosure requirements while disbursing credit, applicants find themselves investing significant time, effort and money while approaching lenders for credit. At SMERA, we have adopted a standardized, comprehensive, transparent and reliable rating process to arrive at a representative risk of a unit. Further, SMERA is supported by SIDBI and a large number of public and private sector banks in the country & such wide acceptance by the lender fraternity has made SMERA Ratings an integral part of the loan sanctioning process. The Rating process is standardized across the industry and sectors and this has enabled simplification of application process to the lenders, thus making it cost-effective for the units while applying for credit either for the first time or while enhancing their credit limit
2) Memorandum of Understanding (MOU) with Banks SMERA has entered into MOUs with 29 Banks/Financial Institutions. Banks such as:, State Bank of India, Punjab National Bank, Syndicate Bank, Canara Bank, State Bank of Bikaner & Jaipur, Dena Bank, Corporation Bank, Union Bank of India, UCO Bank, CitiGroup, Bank of India, Vijaya Bank, Allahabad Bank and Bank of Baroda and many others are working closely with SMERA to popularize third party ratings amongst their existing as well as potential MSME units in the country. Some of these banks are also extending interest rate benefits to better rated SMERA units.
3) Favourable borrowing terms Better Ratings from SMERA has started benefiting MSME units by way of favorable borrowing terms, such as: Lower collateral requirements
Reduced Interest Rates Simplified lending norm 4) Faster Access to Credit SMERA Ratings have enabled banks/ lending institutions in reducing their turnaround time in processing credit applications from the MSME units, thus providing applicants access to timely and adequate credit.
5) Lower Rating Fees SMERA Rating fees are economical and affordable for MSME units, with eligible SSI units enjoying rating fee subsidy up to 75% under the "Performance & Credit Rating Scheme of NSIC". In order to avail the 75% subsidy, the eligible SSI units should possess an valid SSI Registration Certificate / Entrepreneur Memorandum Number (Permanent / Provisional)& should not have availed any rating subsidy in the past from NSIC)..
6) D&B D-U-N-S Number Units availing SMERA Ratings are assigned a unique 9 digit D&B D-U-N-S Number. This number is an international identification number, which provides unique identity to single business entity. D&B D-U-N-S Number is used by the world's most influential standards-setting organizations and is recognized, recommended and/or required by more than 500 global, industry and trade associations for their internal requirements.
7) SMERA : An initiative of leaders SME Rating Agency of India Limited (SMERA) is a joint initiative by Small Industries Development Bank of India (SIDBI), Dun & Bradstreet Information Services India Private Limited (D&B), and several leading banks in the country. SMERA is the country's first & only dedicated rating agency that focuses primarily on the MSME segment. SMERA's primary objective is to provide Ratings that are comprehensive, transparent and reliable. The objective of this Rating is to facilitate greater and easier flow of credit from the banking sector to MSMEs and also as a tool to facilitate self improvement.
8) Fair evaluation amongst peers SMERA Ratings categorize MSMEs on the basis of their size, thus enabling ease of comparison of the rated unit with its peer within the industry. The size categorization enables rational comparison of companies of the same size, thus ensuring that the smaller units are not compared with larger units or companies and are put at a disadvantage while applying for credit.
9) Benefit of SMERA Ratings to Units Enhances credibility of the unit Open doors to corporate sector having large vendor base A tool to instill good governance practices within the unit proving beneficial in the long run Aids in building trust in the international trade partners A tool for self correction and improvement Better SMERA Ratings encourage lenders to offer credit on better terms Enables getting shortlisted by customers/lenders/vendors/private equity and other financiers Approach newly incorporate SME Exchange for broad basing share holding and funding
10) Benefits of SMERA Ratings to Banks/Lenders Provides banks/lenders a neutral, third party and an un-biased opinion on the borrower Provides comfort to lenders Facilitates pricing of loan products on attractive terms Provides an early warning signals to banks during periodic review of accounts
Rating Methodology (Manufacturing) SMERA rating framework considers a number of financial and non financial parameters of the enterprise and the impact of the macro economic factors like government policies, trade policies and regulations and the industry specific dynamics. SMERA believes that the industry in which a SME operates has a direct bearing on the overall performance of the SME and therefore rates SMEs based on industry benchmarks. SMERA Rating is a comprehensive assessment of the enterprise taking into considerations the overall financial and non financial performance of the subject company vis--vis the other peers in the industry in the same line of business and size criteria. Based on its assessment and understanding, SMERA has developed rating methodology framework which mainly addresses the following areas A) Industry Risk The industry in which an enterprise operates plays a crucial role in the credit risk assessment. It is a key determinant of the level and volatility in earnings of any business
B) Business Risk Business risk is the possibility of a credit customers failing to pay because of circumstances connected with the customers business activities and management. I) Market Risk : Market risk is the exposure of the unit to the forward and backward linkage in the course of conducting its business, and the risk of facing sustained periods of unfavorable trends in such factors as product prices, raw material prices, single product dependence, pricing inflexibility, etc. II) Operating Efficiency In markets where competitiveness is largely determined by costs, the market position is determined by the units operational efficiency. The result of these factors is reflected in the ability of the unit to maintain /improve its market share and command differential in pricing. In a competitive market, it is critical for any business unit to control its costs at all levels. This assumes greater importance in commodity or "me too " businesses, where low cost producers almost always have an edge. Cost of production to a large extent is influenced by location of the production unit(s), access to raw materials, access to human resources, scale of operations, technology, level of integration , experience and the ability of the unit to efficiently use its resources.
C) Management Risk Management risk refers to the instance of risk of non payment arising out of a business failure due to the perceived inefficacies of the management. The elements in management risk are assessing the management quality judged on the basis of the basic educational qualification, professional experience of the entrepreneur; and business attitude that is related to the motivation of carrying out the business and pursuing business strategies. Majority of the Indian SMEs are essentially managed by one or two key persons. In this scenario, the quality of management personnel becomes critical. In assessing management quality three factors are critical: Character - relate to the willingness to pay. Apart from the characteristic disposition of honesty and integrity, several aspects are judge in terms of a. b. c. Track record of previous borrowing and payment is an indicator. Whether the owners/ directors have a financial interest in the business. Business premises given the impression of a well-run unit.
Ability - relates basically to the ability to pay. Credit worthiness of the buttoner/borrowing company is assessed, including financial strength, and Capacity - refers to the borrower having technical, managerial and financial abilities in order to operate profitably and succeed in business. Quality of management would determine level of control, overall organizational c