IS CREDIT RATING REQUIRED FOR SMEs?

[Mr. M. GOVINDARAJAN]

                        The Micro, Small and Medium Enterprises are now gaining momentum.  It contributes considerable to the GDP of the country.  Many of the countries have established a SME Development Agency as nodal agency to co-ordinate and oversee all Government interventions in respect of the development of this Sector.   India too enacted Micro, Small and Medium Enterprises Development Act, 2006 which came into force with effect from 02.10.2006. 

                        The MSME is classified into two categories-

• Manufacturing Enterprise – Engaged in the manufacture or production of goods pertaining to any industry in the I Schedule to the Industries (Development and Regulation) Act, 1951 and are defined in terms of investment in plant and machinery.
• Services Enterprises – Engaged in providing or rendering of services and these are defined in terms of investment in equipment.

The monetary limit in investment in the above two sectors are as follows:

Manufacturing Sector –

• Micro Enterprises – Investment in plant and machinery does not exceed Rs. 25 lakhs;
• Small Enterprises – Investment in plant and machinery is more than Rs.25 lakhs but does not exceed Rs. 5 crores;
• Medium Enterprises – Investment in plant and machinery is more than Rs.5 crores but does not exceed Rs.10 crores.

Service Sector-

• Micro Enterprises – Investment in equipment does not exceed Rs.10 lakhs;
• Small Enterprises – Investment in equipment is more than Rs.10 lakhs but does not exceed Rs.2 crore;
• Medium Enterprises – Investment in equipment is more than Rs.2 crores but does not exceed Rs.5 crores.

Whether getting funds from the above said funds is an easy job?  Definitely it is not.   So many formalities are required to be followed.   The funds for SMEs may be raised from the following sources-

• Banks;
• Financial institutions;
• SIDBI initiatives;
• Initial Public Offer;
• Angel Investors;
• Private Equity Fund;
• Foreign investment;
• External Commercial Borrowings;
• Venture Capital Fund;

Banks in addition to the Fund based financing facilities such as cash credit, working capital loans, bills discounting, export financing and non fund based financing facilities such as bank guarantee, letters of credit, deferred payment guarantee, finance projects by way of long term loans to SMEs.

SIDBI is taking initiatives to provide direct finance, sector specific loans, bills receivable finance, letters of credit, credit guarantee up to Rs. 1 crore.  SIDBI has also created Credit Guarantee Fund Trust for Micro and Small Industries and Small and Medium Enterprises Rating Agency and a Venture Capital Fund which has contributed to the corpus of 33 venture capital firms in India.

SMEs can access the capital market through IPO and list its equity shares on stock exchanges meant for SMEs.  In recognition of the need for making finance available to small and medium enterprises, SEBI has decided to encourage promotion of dedicated exchanges and/or dedicated platforms of the exchanges for listing and trading of securities issued by Small and Medium Enterprises. Consequently, SEBI amended SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 ("SEBI (ICDR) Regulations") by inserting a Chapter XA on "Issue of specified securities by small and medium enterprises", through notification dated April 13, 2010. In continuation of the same and to facilitate listing of specified securities in the SME exchange, "Model Equity Listing Agreement" to be executed between the issuer and the Stock Exchange, to list/migrate the specified securities on SME Exchange, is specified through the circular No.CIR/CFD/DIL/6/2010, dated 17.05.2010.

 The Government in many occasions has insisted that credit rating is not required for SMEs for getting loans from banks and financial institutions.  Even though the Government is taking various steps for SMEs to get easier funding it is at the option of the SMEs to make efforts to get the loans easily.  One such initiative they can take up is getting them rated.  More than 14 lakhs SMEs are operating in the country and the bank loans go them is only 8.5%.  The reason for this low rate is that most of the SMEs are from unorganized sector, their credibility is apparently questionable.  Many examples show that only established SMEs were able to get finance though at a higher rate.  In most cases SMEs shy away from getting themselves rated due to the fear that they may not get a good rating or probably because the financial statements that they have prepared to get rated do not reflect a true and fair picture of their performance. However, credit rating agencies are mainly interested in the qualitative parameters because financial statements in SMEs do not give much idea about their performance. So they mostly look at their management and how sound the promoter is, or how resilient the SME has been.

                        Now SEBI has approved the proposal of Bombay Stock Exchange to form SME Exchange.   BSE originally applied for permission for an SME Exchange with SEBI in July 2010.  The SME Exchange will receive the offer documents from the merchant bankers for companies wishing to list on the exchange platform.   Many companies show interest in this exchange.  Nearly 25 have filed a mandate with merchant bankers.  The process of getting listing has been simplified for SMEs.   They do not require regulatory approval for entering the capital market.   The exchange approval is sufficient.   The SME companies need to only submit the offer documents and on receiving the exchange’s approval alone can enter capital market.  The only criteria for the SMEs to qualify for listing is that the promoter share holding to be diluted has to amount to a minimum of Rs.25 crores.  

                        In these circumstances it is highly required that credit rating is required for the development of SMEs.  The benefits of getting a credit rating are manifold because it makes banks comfortable while dealing with them and thus helps in reducing the interest rates. It is an accepted fact that a good rating helps SMEs in obtaining faster and concessional credit from banks. As such credit rating helps for the capital provisioning requirement for SMEs. So undertaking credit and performance rating from a reputed and accredited independent rating agency, I believe, is energy rightly spent.