About CAREImportance of Credit rating for

MSMEs

About CARE Ratings

CARE Ratings has during the last 24 years rated over ` 92 lakh crore* of debt,

involving 56,908* rating assignments. Currently we serve more than 15,000#

clients and have domain expertise in more than 80# industry segments.

* Since inception till March 31, 2017 # As on March 31, 2017

Indian MSME Sector – Overview

51 Million Units

~ 37% of Mfg.Production

~45% of Exports~33% of GDP

~117 Million people employed

MSMEs

…50% of them owned by disadvantaged groups

Source: Annual Report 2015-16 , Ministry of Micro, Small and Medium Enterprises, GOI.

Definition of Micro, Small and Medium Enterprises

ClassificationManufacturingEnterprises # Service Enterprises $

Micro Up to Rs. 25 Lakh Up to Rs. 10 Lakh

SmallBetween Rs. 25 Lakh to Rs. 5 Crore

Between Rs. 10 Lakh to Rs. 2 Crore

MediumBetween Rs. 5 Crore to Rs. 10 Crore

Between Rs. 2 Crore to Rs. 5 Crore

# Investment in Plant & Machinery; $ Investment in Equipments

GST and MSMEs

• Compelled to register to claim tax-credits

• Lower tax burden and easier compliance

• Single tax enhances efficiency improve demand and competitiveness

• Ease in starting new business – lower costs

• Faster logistics and delivery – better use of capital and lower interest costs

Impact

• Formal accounts to be made available

• Efficiency increases, costs decrease and rating can improve

Implications for credit rating

Impact of Demonetization on MSMEs

Immediate impact• Affected employment

• Payments among units impacted due to lack of cash

Outcome and response• Have gone digital

• Started e-invoicing and e-payments

• Digitization will help SMEs increase their market reach especially to potential clients and investors overseas

• Volume of business to improve

What does this mean for credit rating?• Better organization of data

• Rating becomes seamless as data/accounting becomes formal

Product Basket

Bank Loan Ratings

SME Ratings

SME Fundamental Grading

Due Diligence Services

Channel Partner Evaluation/Verification Services

Credit Rating Process

Request for Rating

Submits information and detailed schedules

Interacts with team, responds toqueries and provides additionaldata necessary for the analysis.

Scoring as per SME Rating Model

Client Interaction, Plant / Site Visit.

Bureau check, Data analysis

RATING COMMITTEE awards rating. Rating Letter, report and certificate issued to client

Press Release, published in website, CAREVIEW and Rating Reckoner

Appeal for Review of rating (once)

No

Yes

Accepts Rating?

Reference Check , Market Feedback – From Buyer / Supplier / Banker. TA

T ~

5 d

ays

SME Rating Model Parameters

Management• Track record

• Experience

• Professionalism

• Succession planning

• Group support

• Constitution

Business• Cluster presence

• Product diversification / Uniqueness / Level of value addition

• Product certification

• RM fluctuation

• Forex fluctuation

• Size of ops.

• Geographical reach

• Customer/supplier dealing and diversification

Industry• Level of competition

• Regulatory issues

• Threat of substitutes

Financial• Growth in OI, PAT

• Profitability level and variability

• Solvency Ratio (TD/GCA, TOL/TNW etc.)

• Liquidity ratio (Current ratio, Op cycle)

SME Rating Model

SME Rating Model

Default Rates

Rating scale Sample size Defaults Default Rate

Highest – High 91 1 1.1%

Good – Average 682 15 2.2%

Below Avg. - Poor 231 19 8.2%

Overall 1004 35 3.5%

Defaults distribution from the financial strength scale

Source : CARE Survey.

Benefits of Credit Rating - Lenders

• Capital adequacy norms

• Independent opinion on credit quality

• Reducing information asymmetry

• High interest rates for high risk assets

• Tapping MSME sector falling under high growth trajectory

• Facilitates faster decision making

• Timely planning for riskier assets

• Better financial discipline

Long Term Sustainability

Credit Growth

Asset Liability Management

Risk Return Management

Lender’s objective

s

Whether customers are really benefited?

52%

10%

26%

10%

2%

Client feedback on rating use

Client benefitted / proposalunder consideration

Yet to approach bank

Not benefited

Not used rating

Did not respond

Based on FY13 rated universe of care ratings

The actual benefits availed by Rated MSMEs

Based on FY13 rated universe of care ratings

Thank you