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Transcript of Summer Project Final
A
PROJECT REPORT
ON
“Comparative study of credit rating services offered by CRISIL, CARE, ICRA, FITCH with
reference to SME sector”
FOR
Bank Of Baroda (Worli)
MASTER OF MANAGEMENT STUDIES (MMS)
UNIVERSITY OF MUMBAI
SUBMITTED TO
SINHGAD INSTITUTE OF BUSINESS MANAGEMENT
CHANDIVALI
UNDER THE GUIDANCE OF, SUBMITTED BY
PROF. SREELATHA CHINU R. KWATRA
BATCH-2012-14
ROLL NO-93
SPECIALIZATION-FINANCE
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CERTIFICATE
This is to certify that __________________________________has successfully
completed the project work as a part of academic fulfillment of Masters of
Management Studies (M.M.S.) Semester II examination.
Name & Signature of Project Guide
Date : _________________
DIRECTORSIBM
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DECLARATION
I, Chinu R. Kwatra of Master of Management Studies Semester 3 of Sinhgad Institute
of Business Management (SIBM), hereby declare that I have successfully completed
this Project on Comparative study of credit rating services offered by CRISIL, CARE,
ICRA, FITCH with reference to SME sector in the academic year 2012-2014
The information incorporated in this project is true and original to the best of my
knowledge.
_____________________________
Signature
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ACKNOWLEDGEMENT
It is my pleasure to be indebted to various people, who directly or
indirectly contributed in the development of this work and who influenced my
thinking, behavior, and acts during the course of study.
I express my sincere gratitude to Dr. Meera Vijay, the director for
providing me an opportunity to undergo summer training at Bank of Baroda
I am thankful to Mr.Jayesh Kothari (AGM), Mr. Pankaj (Senior
Manager), Miss Jnanashree (Officer) for their support, cooperation, and motivation
provided to me during the training for constant inspiration, presence and blessings.
I also extend my sincere appreciation to Prof. Sreelatha who provided her
valuable suggestions and precious time in accomplishing my project report.
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PREFACE
As a part of the MBA Circulam and in order to gain practical Knowledge in the field
of management, we are required to make a report on “Comparative study of credit
rating services offered by CRISIL, CARE, ICRA, FITCH and to study reasons as to
why external rating favour other sectors than SME sector” The Basic Objective
behind doing this project report is to get knowledge different tools of finance.
In this project report I have included various services offered by top credit rating
agencies of India and also compared their services. In this project we will also see the
rating procedure, methodology adopted by credit rating agencies. Here, we will study
about the sme sector, the bank’s approach towards sme sector, sme products of the
bank last but not the least we will study why external rating favour Big companies
than sme sector
Doing this Project report helped me to enhance my knowledge regarding the work
done in the bank. I gained knowledge about sme sector, loans and advances, credit
rating done by banks, various policies adopted by bank. It was the live experience
which helped me to enhance my knowledge in banking sector
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INDEX
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EXECUTIVE SUMMARY
Bank of Baroda’s principal activities are to provide banking and related services
through 4,284 branches in India and 93 overseas branches. The services include
accepting deposits, commercial and institutional credit, project finance, treasury,
forex, investment and risk management and other related financial services. As a part
of my M.M.S curriculum I have taken my summer training in Bank Of Baroda
(Worli). As per the topic SMEs-Growth engines for Indian economy, I have analyzed
SSI Sector of India with the help of various web sites related to this sector and other
related sources like journals, files etc.
Here, the overall project is based on analysis of Small and Medium enterprises and the
external rating agencies like Crisil, Care, Icra, Ind-ra. On the investment front, Indian
small businesses are acting on their positive economic outlook with increased capital
investment in the first half of 2008. A majority of the SMEs in the country are
planning to hire more workers while none intended to cut jobs.
The insight of the project report shows the services offered by Credit rating agencies,
rating methodology, rating process, bank’s approach to SME sector, SME products of
Bank of Baroda and reasons stating why Bank favour other sector over SME
sector.“No. 1challenge for SMEs is increasing competition followed by pricing-
pressure in the market and managing customer expectations
STATEMENT OF THE PROBLEM
The project talks about the comparative study of the services offered by Credit rating
agencies like CRISIL, CARE, ICRA AND FITCH and will also discuss why external
rating favour big companies than SME sector. External rating favouring large
companies than sme sector is the problem which will be discussed in the project
SIGNIFICANCE OF THE STUDY
The proposed report will determine the common services provided by credit rating
agencies like CRISIL,CARE,ICRA AND FITCH. This study is also important
because the services are compared, the result of which gave rise to few different
services . The report is important as it discuss why external rating favour large
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companies than sme sector. It also shows that Bank of Baroda who does internal
rating for its customer does not discriminate between large and sme sector.
PURPOSE OF THE STUDY
Banking industry is one of the fastest growing industries in the world. Bank of Baroda
is the bank which is declared as best bank and best public sector banker in the award
ceremony held in 2012.the purpose of the study is to understand the banking system
which not only handle deposits and withdrawal of money but many larger aspect. The
main goal of the project is to learn the credit rating done in bank of Baroda, on what
aspects the customers of bank of Baroda are rated and which are the crucial segment
they see while funding their customers
OBJECTIVES
- To study the credit rating agencies, their services.
- To compare the services offered by CRA
-To study the methodologies of rating provided by CRISIL, CARE, ICRA and IND-
RA (FITCH)
- To analyze and study the reasons, why external rating favour Big companies than
SME sector.
SCOPE AND RATIONALE OF THE STUDY
The study describes the detail comparison of the services rendered by the credit
agencies like Crisil, Care, Icra and Fitch. I will be studying the credit rating agencies,
how do they function, what are the roles of credit rating agencies, what is the
procedure of rating a particular company. With external rating, I will also study about
the internal rating done by bank of Baroda and on what parameters the companies are
rated. I will be studying how this rating helps the companies to grow their business.
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Main objective of the study is to understand the services of credit rating agencies and
make a comparison between them and to find out the reason why external ratings are
not in favour of Small and Medium Enterprises segment.
RESEARCH METHODOLOGY
The study of the project was conducted with the help of primary sources and various
secondary sources as explained below:
(1) PRIMARY SOURCES
For the primary data, I interviewed officers of Bank of Baroda Was provided
with the following information.
Rating methodology
Rating process
Difference between external rating and internal rating
(2) SECONDARY SOURCES
I have collected the secondary data from the various Government institutions
site like RBI, E-books on credit rating agencies. Files of the cases handled by
bank of Baroda, Pdf’s available on internet, web sites of Crisil, Care, Icra and
Ind-Ra (Fitch).
PERIOD OF THE STUDY
8th May, 2013 To 8th July, 2013 (2 Months)
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CHAPTER 1
INTRODUCTION TO BANK OF BARODA
1.1 COMPANY PROFILE
It all started with a visionary Maharaja's uncanny foresight into the future of trade and
enterprising in his country. On 20th July 1908, under the Companies Act of 1897, and
with a paid up capital of Rs 10 Lacs started the legend that has now translated into a
strong, trustworthy financial body, THE BANK OF BARODA.
The founder, Maharaja Sayajirao Gaekwad, with his insight into the future, saw "a
bank of this nature will prove a beneficial agency for lending, transmission, and
deposit of money and will be a powerful factor in the development of art, industries
and commerce of the State and adjoining territories."
It has been a long and eventful journey of almost a century across 25 countries.
Starting in 1908 from a small building in Baroda to its new hi-rise and hi-tech Baroda
Corporate Centre in Mumbai, is a saga of vision, enterprise, financial prudence and
corporate governance.
It is a story scripted in corporate wisdom and social pride. It is a story crafted in
private capital, princely patronage and state ownership. It is a story of ordinary
bankers and their extraordinary contribution in the ascent of Bank of Baroda to the
formidable heights of corporate glory. It is a story that needs to be shared with all
those millions of people - customers, stakeholders, employees & the public at large -
who in ample measure, have contributed to the making of an institution
1.2 MISSION STATEMENT
To be a top ranking National Bank of International Standards committed to
augmenting stake holders' value through concern, care and competence.
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1.3 LOGO
Our new logo is a unique representation of a universal symbol. It comprises dual ‘B’
letterforms that hold the rays of the rising sun. We call this the Baroda Sun
1.4 ACHIEVEMENT
Bank of Baroda awarded Best PSU Bank Award for the year 2011-12
Bank of Baroda Receives Award for Excellence in Financial Reporting
Bank of Baroda conferred Best Public Sector Bank Award
Bank of Baroda bags The Sunday Standard FINWIZ 2012 Awards
Bank of Baroda won 2 awards at The Sunday Standard FINWIZ 2012 in the
following category:
Best Indian Bank – Large (Runner up)
Best Public Sector Banker – Large (Runner up)
Bank of Baroda bags Best Public Sector Bank Award by CNBC TV18-‘India
Best Banks and Financial Institutions Awards 2012’
Bank of Baroda bags Forbes India Leadership Award
Most Efficient Bank in Kenya-11.06.2011
Business World Best Bank 2011 Awards
Fastest Growing Bank- Large
Banker of the Year to Shri M D Mallya, Chairman & Managing Director.
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CHAPTER 2
2.1 INTRODUCTION
2.1.1 CREDIT RATING AGENCIES
With the increasing market orientation of the Indian economy, investors value a
systematic assessment of two types of risks, namely “business risk” arising out of the
“open economy” and linkages between money, capital and foreign exchange markets
and “payments risk”. With a view to protect small investors, who are the main target
for unlisted corporate debt in the form of fixed deposits with companies, credit rating
has been made mandatory. India was perhaps the first amongst developing countries
to set up a credit rating agency in 1988. The function of credit rating was
institutionalised when RBI made it mandatory for the issue of Commercial Paper (CP)
and subsequently by SEBI. When it made credit rating compulsory for certain
categories of debentures and debt instruments. In June 1994, RBI made it mandatory
for Non-Banking Financial Companies (NBFCs) to be rated. Credit rating is optional
for Public Sector Undertakings (PSUs) bonds and privately placed non-conve11ible
debentures upto Rs. 50 million. Fixed deposits of manufacturing companies also come
under the purview of optional credit rating.
2.1.2 MEANING AND DEFINITION
Credit rating is the opinion of the rating agency on the relative ability and willingness
of tile issuer of a debt instrument to meet the debt service obligations as and when
they arise. Rating is usually expressed in alphabetical or alphanumeric symbols.
Symbols are simple and easily understood tool which help the investor to differentiate
between debt instruments on the basis of their underlying credit quality. Rating
companies also publish explanations for their symbols used as well as the rationale for
the ratings assigned by them, to facilitate deeper understanding.
In other words, the rating is an opinion on the future ability and legal obligation of the
issuer to make timely payments of principal and interest on a specific fixed income
security. The rating measures the probability that the issuer will default on the
security over its life, which depending on the instrument may be a matter of days to
thirty years or more. In fact, the credit rating is a symbolic indicator of the current
12 | P a g e
opinion of the relative capability of the issuer to service its debt obligation in a timely
fashion, with specific reference to the instrument being rated. It can also be defined as
an expression, through use of symbols, of the opinion about credit quality of the issuer
of security/instrument.
2.2 FUNCTIONS OF A CREDIT RATING AGENCY
A credit rating agency serves following functions:
1. Provides unbiased opinion: An independent credit rating agency is likely to
provide an unbiased opinion as to relative capability of the company to service debt
obligations because of the following reasons: i. It has no vested interest in an issue
unlike brokers, financial intermediaries. ii. Its own reputation is at stake.
2. Provides quality and dependable information:. A credit rating agency is in a
position to provide quality information on credit risk which is more authenticate and
reliable because: i. It has highly trained and professional staff who has better ability to
assess risk. ii. It has access to a lot of information which may not be publicly
available.
3. Provides information at low cost: Most of the investors rely on the ratings
assigned by the ratings agencies while taking investment decisions. These ratings are
published in the form of reports and are available easily on the payment of negligible
price. It is not possible for the investors to assess the creditworthiness of the
companies on their own.
4. Provide easy to understand information: Rating agencies first of all gather
information, then analyse the same. At last these interpret and summarise complex
information in a simple and readily understood formal manner. Thus in other words,
information supplied by rating agencies can be easily understood by the investors.
They need not go into details of the financial statements.
5. Provide basis for investment: An investment rated by a credit rating enjoys higher
confidence from investors.
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Investors can make an estimate of the risk and return associated with a particular rated
issue while investing money in them.
6. Healthy discipline on corporate borrowers: Higher credit rating to any credit
investment enhances corporate image and builds up goodwill and hence it induces a
healthy/ discipline on corporate.
7. Formation of public policy: Once the debt securities are rated professionally, it
would be easier to formulate public policy guidelines as to the eligibility of securities
to be included in different kinds of institutional port-folio.
2.3 SEBI GUIDELINES FOR CREDIT RATING AGENCIES
SEBI vide CIR/MIRSD/CRA/6/2010 dated May 3, 2010 has provided for certain
transparency and disclosure norms for the Credit Rating Agencies (“CRAs”). The
major measures taken in this regard are summarized below:
1. CRAs should maintain records of the rating committee, including voting details and
notes of dissent, for a period of five years.
2. It has been made mandatory for CRAs to publish information about the historical
default rates of their rating categories and whether the default rates of these categories
have changed over time.
3. CRAs should ensure that its analysts do not participate in any kind of marketing
and business development, including negotiations of fees with the issuer whose
securities are being rated. Also, the employees involved in the credit rating process
and their dependants cannot own shares of the issuer.
4. CRAs while rating structured finance products, are barred from providing
consultancy or advisory services regarding the design of the structured finance
instrument. This prohibition would apply to the subsidiaries of CRAs too. While
publishing the ratings of structured finance products and their movements, CRAs
apart from following all the applicable requirements in case of non-structured ratings
14 | P a g e
should also disclose the track record of the originator and details of nature of
underlying assets while assigning the credit rating.
5. In case of unsolicited credit ratings (the credit ratings not arising out of the
agreement between the CRAs and the issuer), credit rating symbol should be
accompanied by the word “UNSOLICITED” in the same font size.
6. CRAs should also disclose (i) the policies, methodology and procedures in detail
followed by them regarding solicited and unsolicited credit ratings, (ii) the history of
credit rating of all outstanding securities, (iii) the general nature of its compensation
arrangements with the issuers and (iii) the details of any relationship it has with the
issuer whose securities are being rated and any of its associate of such issuer and the
CRAs or its subsidiaries.
SEBI commented that the recent events in global financial system have underlined the
pivotal role that credit ratings play. Effective use of credit ratings by the users is
crucially dependent upon quality and quantity of disclosures made by the CRAs.
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CHAPTER 3
CREDIT RATING AGENCIES IN INDIA
Credit Rating Information Services of India Limited (CRISIL)
CRISIL is a global analytical company providing ratings, research, and risk and
policy advisory services. It is India's leading ratings agency and also the foremost
provider of high-end research to the world's largest banks and leading corporations.
With sustainable competitive advantage arising from our strong brand, unmatched
credibility, market leadership across businesses, and large customer base, they deliver
analysis, opinions, and solutions that make markets function better.
They empower customers, and the markets at large, with independent analysis,
benchmarks and tools. These help lenders and borrowers, issuers and investors,
regulators, and market intermediaries make better-informed investment and business
decisions. Their offerings allow markets and market participants to become more
transparent and efficient - by mitigating and managing risk, taking pricing decisions,
generating more revenue, reducing time to market and enhancing returns
Credit Analysis & Research Ltd. (CARE)
CARE Ratings commenced operations in April 1993 and over nearly two decades, it
has established itself as the second-largest credit rating agency in India. With the
rating volume of debt of around Rs.45,901 bn (as on December 31, 2012) , CARE
Ratings is proud of its rightful place in the Indian capital market built around investor
confidence. CARE Ratings has also emerged as the leading agency for covering many
rating segments like that for banks, sub-sovereigns and IPO gradings.
CARE Ratings provides the entire spectrum of credit rating that helps the
corporates to raise capital for their various requirements and assists the investors to
form an informed investment decision based on the credit risk and their own risk-
return expectations. Our rating and grading service offerings leverage our domain and
analytical expertise backed by the methodologies congruent with the international best
practices.
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India Ratings & Research (IND-RA) -FITCH
India ratings & research (ind-ra) is India’s most respected rating agency committed to
providing the India’s credit markets with accurate, timely and prospective credit
opinions. Built on a foundation of independent thinking, rigorous analytics, and an
open & balanced approach towards credit research, ind-ra has grown rapidly during
the past decade gaining significant market presence in India’s fixed income market.
Ind-ra currently maintains coverage of corporate issuers, financial institutions, which
includes banks and insurance companies, finance & leasing companies and managed
funds, urban local bodies and project finance.
Ind-ra has six offices in India located at Mumbai, Delhi, Chennai, Bangalore,
Hyderabad and Kolkata. Ind-ra is recognised by the securities and exchange board of
India, the reserve bank of India and national housing bank.
Internet Content Rating Association (Icra)
ICRA Limited (formerly Investment Information and Credit Rating Agency of India
Limited) was set up in 1991 by leading financial/investment institutions, commercial
banks and financial services companies as an independent and professional
Investment Information and Credit Rating Agency.
Today, ICRA and its subsidiaries together form the ICRA Group of Companies
(Group ICRA). ICRA is a Public Limited Company, with its shares listed on the
Bombay Stock Exchange and the National Stock Exchange.
Alliance with Moody’s Investors Service
The international Credit Rating Agency Moody’s Investors Service1 is ICRA’s largest
shareholder. The participation of Moody’s is supported by a Technical Services
Agreement, which entails Moody’s providing certain high-value technical services to
ICRA. Specifically, the agreement is aimed at benefiting ICRA’s in-house research
capabilities, and providing it with access to Moody’s global research base.
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CHAPTER 4
Comparative study of services Offered by
CRISIL, CARE, ICRA and FITCH
CRISIL CARE ICRA IND-RA
(FITCH)
STRUCTURED
FINANCE
- Bonds/ LT
instruments
- CPs/ ST instruments
- PTCs/ SF instruments
- non convertible
debentures
- All Structured
Finance
STRUCTURED
FINANCE
- Bonds/ LT
instruments
- CPs/ ST instruments
- PTCs/ SF
instruments
- ABS
- CMBS
- RMBS
- Structured Credit
STRUCTURED
FINANCE
- ABS
- MBS
- CDO
- FFT
- PGS
STRUCTURED
FINANCE
- All Structured
Finance
- ABS
- CMBS
- RMBS
- Structured Credit
- Operational Risk
Group
SME RATINGS SME RATINGS SME RATINGS SSI/SME RATING
REAL ESTATE
RATINGSREAL ESTATE
RATING
REAL ESTATE
GRADING
NIL
PUBLIC FINANCE
RATING
PUBLIC FINANCE
RATING
- Urban Local Bodies
- State Government
PUBLIC FINANCE
- State government
- Local Bodies
PUBLIC FINANCE
- Corporations
- Municipal
corporations
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- Other Local Bodies
RESEARCH
-Economy Research
-Industry Research
-Company Report
-Customised Research
RESEARCH
- Industry Research
- CARE Industry Risk
Metrics
- Customized
Research
RESEARCH
- Industry Research
NIL
CAPITAL MARKET
& FINANCIAL
MARKET
-Banks
-Non Banking
-Asset Manangement -
Companies
Insurance
- Crisil equities
- Mutual fund research
- Indices-iisl
FINANCIAL
SECTOR RATING
- Banks
- Non Banking
- Financial Company
- Housing Finance
Company
- Insurance Rating
- Mutual Fund
FINANCIAL
SECTOR RATING
- Banks
- NBFCs
- Housing finance
company
-Mutual Fund
- Claims paying
ability rating
(Insurance)
FINANCIAL
INSTITUTIONS
- Banks/ NBFCs
- Asset Management
Companies
- Insurance
INFRASTRUCTURE PROJECT
FINANCE RATING
PROJECT
FINANCE
RATING
INFRASTRUCTURE
& PROJECT
FINANCE
CORPORATE
- Debt Rating
- Recovery Risk Rating
- Bank loan Rating
CORPORATE
- Corporate Debt
Rating
- Bank loan Ratings
CORPORATE
- Long term
- Medium term
- Short term
CORPORATE
- Long term Debt
- Medium-Term Notes
- Commercial Paper
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- Governance & Value
Creation
- Fund Rating
- Financial Strength
Rating
- Bank Loan Ratings
(Basel II)
- Issuer Rating
- Corporate
- Governance Rating
- Recovery Rating
Bank loan rating
- Corporate
governance rating
- Preferred Stock
- Bank Loan Rating
GRADING
- Maritime Gradings
- MFI Gradings
- Broker Quality
Gradings
- Business school
gradings
GRADING
- Construction
Grading
- Shipyard Grading
- Edu-Grade
- Real Estate Project
- Star Rating
- IPO Grading
- EquiGrade
- RESCO Grading
- MFI Grading
GRADING
-Grading of IPO
-Solar power grading
- Micro finance
institution
- Construction
grading
- Maritime grading
- Health care grading
- Financial strength
grading
- Engineering
colleges/ universities
- Management
education institutes
GRADING
- Solar Grading
- IPO Grading
EQUITY RESEARCH
SERVICES
EQUITY
RESEARCH
SERVICES
EQUITY
RESEARCH
SERVICES
EQUITY RESEARCH
SERVICES
OTHER SERVICES
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GLOBAL
RESEARCH
& ANALYTICS
- Investment Banking
Research
- Credit Research
- Retail Brokerage
Research
- Derivatives off
shoring
- Financial Technology
- FX and Economics
- Quantitative
Analytics
- Commodities
Research
- Risk and Actuarial
Services
- Private Wealth
Management
- Insurance Actuarial
Services
-Retail Risk Analytics
CONSULTING
SERVICES
ICRA Management
Consulting Services
Limited (IMaCS)
CREDIT MARKET
RESEARCH
EXECUTIVE
TRAINING
PROJECT CREDIT
RATING
Rating process of the rating companies like CRISIL, CARE, ICRA & FITCH.
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CHAPTER 5
There is a common rating process followed by all the above mentioned credit rating
companies. The process is explained below in detail
Explanation of Fig .1
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ISSUER CREDIT RATING COMPANY
REQUEST FOR RATING
SIGNS RATING AGREEMENT PROVIDES
INFORMATION AND RATING FEES
MANAGEMENT INTERACTIONS WITH THE
RATING TEAM
ACCEPTS THE RATING OR
APPEAL
RATING TEAM ASSIGNED.
TEAM COLLECTS INFORMATION, CONDUCTS PRELIMINARY ANALYSIS.
TEAM CONDUCTS VISITS AND PERFORMS ANALYSIS.
ANALYSIS PRESENTED TO RATING COMMITTEE.
RATING ASSIGNED AND COMMUNICATED TO
ISSUER
RATING DISSEMINATED AND CARRIED IN
WEBSITE
ALL RATINGS KEPT UNDER CONTINUOUS SURVEILLANCE
THROUGHOUT VALIDITY
ISSUER REQUEST FOR A REVIEW AND PROVIDES
FRESH INPUTS
ACCEPTED
NOT ACCEPTED
Fig. 1
Rating is a multilayered decision making process. The process of rating starts with
a rating request from the issuer, and the signing of a rating agreement. The rating
agreement has important clauses like confidentiality, agreement by the issuer to
share information with the CRA for the purpose of assigning the rating and
thereafter on an ongoing basis when the rating is under surveillance.
The rating agency undertakes discussion with the management of the issuing
entity. Discussions during a management meeting are wide-ranging, covering
competitive position, strategy, financial policy, historical performance, and near-
and long-term financial and business outlook.
Discussions with company managements help rating analysts evaluate management
capability and risk appetite, which is an important aspect of the evaluation. After
discussion with the issuer's management, a report is prepared detailing the analyst
team‘s assessment of the business risk, financial risk, and management risk
associated with the issuer.
The report is then presented to the rating committee. This is the only aspect of the
process in which the issuer does not directly participate.
Drawing on the knowledge and expertise of the participants, the rating committee
determines the rating.
The process is an attempt to ensure objectivity of the rating, since the decision
results from the collective thinking of a group of experts analysing the risks
pertaining to the issuer and its competitors in the industry and markets in which
they operate.
On finalisation of a rating at the rating committee meeting, the rating decision is
communicated to the issuer.
As the decision to get an initial rating is at the issuer's discretion (except, in India,
for public issues of debt), the global best practice is to allow the issuer to decide
whether to accept the rating.
If the issuer disagrees with the rating, it can also appeal for a fresh look at the
rating assigned. The rating committee then discusses the information submitted; it
may or may not decide to modify the rating, depending on the facts of the case.
If the rating is not changed and the issuer continues to disagree with the rating, it
can choose not to accept the rating, which then does not get published.
CHAPTER 6
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SME SECTOR
6.1 INTRODUCTION
The small and medium enterprises today constitute a very important segment of
the Indian economy. The development of this sector came about primarily due to the
vision of our late Prime Minister Jawaharlal Nehru who sought to develop core
industry and have a supporting sector in the form of small scale enterprises. SMEs
sector has emerged as a dynamic and vibrant sector of the economy. Today, it
accounts for nearly 35% of the gross value of output in the manufacturing sector and
over 40% of the total exports from the country. In terms of value added this sector
accounts for about 40% of the value added in the manufacturing sector. The sector's
contribution to employment is second highest next to agriculture.
The SMEs sector has grown rapidly over the years. The growth rates during the
various plan periods have been very impressive. The number of small-scale units has
increased from an estimated 6.79 million units in the year 1990-91 to over 13 million
in the year 2007-08. When the performance of this sector is viewed against the growth
in the manufacturing and the industry sector as a whole, it instills confidence in the
resilience of the SMEs Essector.
The SME segment is broadly classified as under
Particulars Investment in Plant & Machineries in case of Manufacturing Enterprises
Investment in Equipment in case of Service Sector Enterprises
Micro Enterprises Upto Rs. 25/- lacs Upto Rs.10/- lacs
Small Enterprises Above Rs. 25/- lacs and upto Rs.500/- lacs
Above Rs.10/- lacs and upto Rs.200/- lacs
Medium Enterprises Above Rs.500/- lacs and upto Rs.1000/- lacs
Above Rs.200/- lacs and up to Rs.500/- lacs
6.2 MANUFACTURING AND SERVICE SECTOR
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The micro, small and medium enterprises in manufacturing and
service sector are defined as under in MSMED act, 2006.
MANUFACTURING SECTOR Micro Enterprise (Manufacturing) is an enterprise engaged in
manufacture/production or preservation of goods and whose investment in plant and
machinery (original cost excluding land and building and the items specified by the
Ministry of Small Scale Industries) does not exceed Rs. 25.00 Lacs irrespective of
location of the unit.
Small Enterprise (Manufacturing) is an enterprise engaged in
manufacture/production or preservation of goods and whose investment in plant and
machinery (original cost excluding land and building and the items specified by the
Ministry of Small Scale Industries) is more than Rs. 25.00 lacs but does not exceed
Rs. 5.00 crores and
Medium Enterprise (Manufacturing) is an enterprise engaged in
manufacture/production or preservation of goods and whose investment in plant and machinery (original cost excluding land and building and the items specified by the
Ministry of Small Scale Industries is more than Rs.5.00 crores but does not exceed
Rs.10.00 crores.
SERVICE SECTOR Enterprises engaged in providing or rendering services whose investments in
equipment (original cost excluding land & Building and Furniture, Fittings and other
items not directly related to the service rendered or as may be notified under MSMED
Act, 2006) are as detailed here under:
Micro Enterprise (Service) is an enterprise where the investment in equipment does
not exceed Rs. 10.00 lacs;
Small Enterprise (Service) is an enterprise where the investment in equipment is
more than Rs.10.00 lacs but does not exceed Rs. 2.00 crores and
Medium Enterprise (Service) is an enterprise where the investment in equipment is
more than Rs. 2.00 crores but does not exceed Rs. 5.00 crores.
6.3 COMPOSITION OF SME SECTOR
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The SME Sector includes Micro Enterprises, Small Enterprises, Artisans & Village
Industries, Medium Enterprises, Service Sector units & individual sub-sector units.
Micro Enterprises
Micro Enterprises are those engaged in manufacturing, processing, preservation of
goods, mining, quarrying, servicing & repairing of specified type of machinery &
equipment, agro service units whose investment in Plant and Machineries does not
exceed Rs. 25.00 lacs irrespective of location of the unit in respect of manufacturing
units and investment in equipments not exceeding Rs 10.00 lacs in respect of Service
Sector units.
Small Enterprises:
A Small Enterprise industrial undertaking / unit is one which is engaged in the
manufacture, processing or preservation of goods or is a servicing and repair
workshop undertaking repairs of machinery used for production, mining or quarrying
or custom service unit (except water service units), having investment in Plant and
Machineries (original cost) above Rs 25.00 lacs but not exceeding Rs. 5.00 crores in
respect of manufacturing unit and above Ra 10.00 lacs but not exceeding Rs 2.00
crores in respect of Service Sector unit.
Medium Enterprises
A Unit which is engaged in the manufacture, processing or preservation of goods or is
a servicing and repair workshop undertaking repairs of machinery used for
production, mining or quarrying or custom service unit (except water service units),
with investment in Plant & Machinery in excess of Rs 5.00 crores and upto Rs.10.00
crores in respect of manufacturing units and investment in equipments in excess of Rs
2.00 crores and upto Rs 5.00 crores in respect of Service Sector units will be treated
as Medium Enterprises (MEs).
Khadi and Village Industries Sector (KVI)
All advances granted to units in the KVI sector, irrespective of their size of
operations, location and amount of original investment in Plant and Machinery.
CHAPTER 7
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7.1 BANK OF BARODA’S APPROACH TO SME SECTOR
SMEs are growth engines for development of Economy.
BOB has therefore for internal purposes given focused attention to finance all
Commercial enterprises i.e. enterprises which may be outside the purview of
regulatory definition of SME but having turnover upto Rs 150.00 crores and
new infrastructure and real estate projects where the project cost is upto Rs.
50/- crores by treating them as part of SME segment.
SME Banking business will thus include the following across the bank:
Micro, Small and Medium Enterprises – as per regulatory definition
irrespective geographical location, i.e. rural, semi-urban, urban, metro areas.
All other entities with their annual sales turnover of Rs. 1/- crore to Rs. 150/-
crores and new infrastructure and real estate projects, where the project cost is
upto Rs. 50/- crores.
SMEs which are Associate/sister concerns of Wholesale Banking customers.
Clubs, Trusts, etc.
Financing under various Government schemes launched for MSME Sector.
However, such units, which are outside the purview of regulatory definition
will not form part of Priority Sector lending.
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7.2 CODE OF BANK’S COMMITMENT TO MICRO & SMALL
ENTERPRISES (MSE CODE) BOB is a member of The Banking Codes and Standards Board of India (BCSBI), who
has formulated Code of Bank‟s Commitment to Micro & Small Enterprises which has
been adopted by BOB. This Code sets minimum standards of banking practices for
banks to follow when they are dealing with Micro & Small Enterprises (MSEs) as
defined in the Micro, Small & Medium Enterprises Development (MSMED) Act,
2006.
The MSE Code broadly covers the following areas: Objectives of the Code
Commitment of banks to the customers
Information regarding availability of interest rates, tariff schedule etc.
Privacy and confidentiality
Lending methods
Collection of dues
Features pertaining deposit accounts
Services offered
Complaints, grievances and feed back (bank‟s internal procedures and Banking
Ombudsman Scheme)
Products and services
Protection to customers
The Code will be reviewed within a period of 3 years. The Code does not replace or
supersede regulatory guidelines issued by RBI/bank from time to time.
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The focal points which banks are expected to comply with in the area of lending.
Banks to make available free of cost, simple, standardized and easy to understand
application forms for loans to MSEs.
All loan applications should be acknowledged in writing.
All loan applications should be disposed off within the stipulated time as under
from the date of receipt of application complete in all respects and accompanied by
documents as per the check list:
For credit limits upto Rs. 2/- lacs Within 2 weeks
For credit limits upto Rs. 5/- lacs Within 4 weeks
For credit limits exceeding Rs. 5/-
lacs
Within a reasonable time frame (4
weeks)
It should be ensured that sanctioned loans are disbursed within 2 working days from
the date of compliance of all terms and conditions of sanction/documentation.
In case of rejection of application, reasons for rejection should be conveyed in
writing to the applicant for credit facilities.
No collateral security should be insisted upon for credit limits upto Rs. 10/- lacs.
To provide working capital limits to Micro & Small Enterprises (Manufacturing)
on the basis of minimum of 20% of projected turnover.
No processing charges to be recovered if loan upto Rs. 5/- lacs is not sanctioned.
To follow credit rating system, the parameters of which should be shared with the
borrowers.
To permit prepayment of loans upto Rs.5/- lacs without levying any pre-payment
penalty.
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7.3 SME PRODUCTS IN BANK OF BARODA
The following products are launched for SME sector across the country:
Baroda SME Gold Card providing additional 10% facility over the assessed
MPBF for meeting emergent business requirements.
Baroda SME Loan Pack providing single line of credit for meeting SME
borrowers‟ working capital as well as long term requirements within the overall limit
approved by the bank as per the eligibility, i.e. 4.5 times of borrower‟s tangible net
worth as per last audited Balance Sheet, or Rs. 5/- crores, whichever is lower.
Baroda Overdraft against Land & Building is a unique product for financing
working capital requirements, long term margin requirements of SME borrowers
against the security of unencumbered land and building belonging to the unit, or,
promoters of the unit, upto a maximum limit of Rs. 5/- crores depending on the
location, viz. rural and semi-urban, urban and metro.
Baroda Vidyasthali Loan providing finance to Educational Institutional upto a
limit of Rs. 10/- crores on liberalized terms. This scheme is implemented at select
branches of the Bank depending on the business potential.
Baroda Arogyadham Loan for providing finance for setting up new Nursing
Homes, Hospitals including Pathological Laboratories, renovation of existing Nursing
Homes/Hospitals, purchase of medical diagnostic equipments as also office
equipments etc. and to meet working capital requirement upto a maximum limit of
Rs.12/- crores, depending on the location, on liberalized terms. This scheme is also
implemented at select branches of the bank.
Scheme for financing existing SME customers/Current Account holders for
purchase of new vehicles upto a limit of Rs. 50/- lacs with 10% margin.
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CHAPTER 7.4
RATING METHODOLOGY FOR SME SECTOR
Ratings on SME reflect the rated entities overall creditworthiness, adjusted in relation
to other SMEs. These ratings are entity-specific, and not specific to debt issuances.
Outlined below is the rating methodology used to assess the creditworthiness of SMEs
with on-going business units and without any large projects. The rating methodology
for assessment under both rating scales is the same. The methodology is
comprehensive and covers three broad categories of risk – business risk, management
risk, and financial risk.
SR
NO. BUSINESS RISK MANAGEMENT RISK FINANCIAL RISK
1
Assessing the sustainability of the business plan
Management evaluation is an evaluation of the promoters’ competence.
Accounting Standards by ICAI and guidelines of the companies’ act.1956 must be followed.
2
Qualitative assessments of the track record of the business
SME rating depends on the entrepreneurship and resourcefulness of the promoters
Analysis is based on disclosed financial statements
3
Assessing the quality of an SME’s relationship with its key customers.
CRA’s looks at the past performance of the entity and group companies
Bankers are contacted to assess the nature and history of the relationship and performance of the loans and bank accounts.
4
To assess the entity’s manufacturing facilities
Assesses the organisational structure of the entity and the quality of its systems and processes
The ratio calculations are fine-tuned to suit the requirements of the SME sector
5
Assessing the quality of an SME’s relationship with its suppliers
Assessment of an SME’s financial risk profile also attempts to assess the entity’s financial flexibility.
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7.5 CREDIT RATING FOR SME SECTOR IN BANK OF BARODA
(i) Internal Credit Rating System
The internal comprehensive credit rating system under BOBRAM (CRISIL) Model
has been approved by the bank and is already in place as advised to all branches. The
BOBRAM model is applicable to MSME accounts having exposure of above Rs. 2
Crores.
Board in their meeting dated 02.07.2009 has approved introduction of New Scoring
Card type of Model for rating the MSME accounts with exposure of Rs. 25 Lac to Rs.
2 Crore.
As per extant guidelines, periodicity of credit rating in respect of borrowal accounts
enjoying credit facilities (Fund Based and Non Fund Based) of Rs.5 crores and above
is half yearly and in other accounts on annual basis. Pricing of loan to be decided
based on the guidelines issued from time to time.
(ii) External Credit Rating System (NOT ELIGIBLE UNDER BASEL-II
NORMS OF CAPITAL ADEQUACY)
Small Enterprises borrowers are rated by few external credit rating agencies. In case
of MEs, some of the borrowers are getting their accounts rated by external credit
agency like CRISIL etc.
M/s. CRISIL, the pioneer of independent credit rating agencies in India, has entered
into an agreement with M/s. National Small Industries Corporation who has recently
introduced a credit rating scheme for encouraging units to get them rated by reputed
credit rating agencies.
BOB has entered into MOU with credit rating agencies viz: M/s CRISIL, Dun &
Bradstreet, SMERA to get our SME borrowers rated.
(iii) External Credit Rating System (UNDER BASEL-II NORMS OF CAPITAL
ADEQUACY)
External Credit Rating should be carried out in all SME loan accounts with credit
limits of above Rs 5 crores by any one of the RBI approved external credit rating
agencies. Presently ICRA, CARE, CRISIL and FITCH are the only Reserve Bank of
India approved external credit rating agencies in India. The exposure to SME
borrower rated by any of these rating agencies will be recognized as rated exposure
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for the purpose of computation of Risk Weighted Assets under Standardized
Approach of credit risk under Basel-II guidelines.
Pricing be continued to be linked to our internal credit rating system. However due
weightage will be given for the external credit rating by the external rating agency.
According to the study, it was seen no discrimination was done between large
companies and sme sector. The company dint favours any segment for rating. The
internal rating of BOB was done for the existing customers only.BOB worli branch
rated 20-25 SME’s and provided loans to many. Credit rating was done by BOB itself,
only the software of rating was provided by CRISIL as in 2001 Crisil and BOB signed
a MOU.
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7.6 LOAN TO SMES
Salient features of the Credit Guarantee Fund Trust for Micro and Small
Enterprises (CGTMSE)
o The eligible loan limit under the Scheme is now Rs.100 lakhs.
o The credit guarantee cover has been raised from 75% to 85% for the
following category of loans:
a. Loans to Micro enterprises upto Rs. 5 lakh; and
b. Loans to Micro and Small enterprises operated and/ or owned by
women.
o The coverage of the Scheme will now be extended to all new and existing
Micro and Small Enterprises (both in the Manufacturing Sector as well as
Service Sector).
INTEREST RATES ON MICRO ENTERPRISES ADVANCES
TYPE OF ADVANCEREVISED RATE OF INTEREST ON
ADVANCES W.E.F. 1st AUGUST 2011- %AGE PER ANNUM
BASE RATE = 10.75%Size of the limit of the Micro Enterprises
IMaCS Rating Grade
Rate Of Interest
Up to Rs 50000 N.A Base Rate +1.75% = 12.50%Above Rs 50000 but up to Rs 2.00 Lacs
N.A Base Rate +2.50% = 13.25%
Above Rs 2.00 Lacs but up to Rs 25.00 Lacs
N.A Base Rate + 2.75% = 13.50%
Above Rs.25.00 lac and up to Rs.1.00 crore
1 Base Rate +2.50% = 13.25%2 Base Rate + 3.00% = 13.75%3 Base Rate + 4.00% = 14.75%
Below 3 Base Rate + 5.00% = 15.75%Above Rs.1.00 crore 1 Base Rate + 2.75% = 13.50%
2 Base Rate + 3.00% = 13.75%3 Base Rate + 4.00% = 14.75%
Below 3 Base Rate + 5.50% = 16.25%
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CHAPTER 8
CHALLENGES FOR SME SECTOR Medium Enterprises (SMEs) play a very significantSME’s role in the economy is in terms of balanced and sustainable growth,
employment generation, development of entrepreneurial skills and contribution to
export earnings. However, despite their importance to the economy, most SMEs are
not able to stand up to the challenges of globalisation, mainly because of\ difficulties
in the area of financing. With the opening up of the Indian economy, it has become
necessary
to consider measures for smoothening the flow of credit to this se
The biggest challenge for SMEs in India are-
Effective financial management both for running of the organization as well as for
expansion activities taking in to consideration the global competition.
Raising funds from financial institutions like banks, NBFCs for SMEs are till date a
big challenge.
It is estimated that only 16% of Indian SME sector have been given bank /institutions
support and the rest of the sector is unable to get support. The main reason for these
lacunae is, not having efficient management tools in place, lack of knowledge of
banking guidelines, ineffective mechanism to weigh the credit worthiness of the
company.
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8.1 IMPORTANCE OF CREDIT RATING FOR SME SECTOR
The rating scale places very imminent role in determining the quantum of loan to be
provided to the company.
For ex; if the company is doing in par with the industry and they want to rapidly
expand, the banker may have their discretion to sanction the amount taking in to
consideration the industry, management, capability of the company etc and banker
may sanction full money requested for expansion or they may ask the management to
slow down in their expansion by reducing the capex(Capital Expenditure)
investment.
Very high rating for the company will definitely have an upside benefit of interest rate
reduction from anywhere between .5% -1.5%, which may give substantial benefit for
the company and it may increase the company’s profitability.
An reduction of 1% interest rate for the loan of 2 crores may give the benefit of close
to 2 lacs benefit for the company, which will be directly adding to the bottom line of
the company(PAT-Profit after tax)
CHAPTER 9
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EXTERNAL RATINGS FAVOUR OTHER SEGMENT THAN
SME SECTOR
Large Corporates
Large Corporates has dedicated full time IT staff with specific expertise to manage
specific applications or parts of the IT infrastructure. They have departments like
marketing, human resource, finance etc. Large corporate have huge investment,
infrastructure and assets.
It’s easy to rate large corporate because it has organised information on industries,
market shares, competition dynamics and promoter or management track record.
Large companies with strong and stable cash flows are likely to be rated higher than
small companies with more volatile cash flows
Due to this the large Corporates are favourite of external rating. Credit rating agencies
favour large Corporates because they are high on capital and the information is easily
accessible. They can also pay higher fees to get their company rated.
The reasons why external rating do not favour sme sector are as follows:-
Speculated balance sheets
A balance sheet is a snapshot of a company's financial status. This document contains
all of company's financial activity over the past fiscal year. The company, investors,
the stock market and the public typically refer to a company's balance sheet to gauge
whether a company is healthy or in decline. The ability to determine the integrity and
quality of a balance sheet is vital to make accurate business decisions.
The SME’s are the enterprises with lack of infrastructure and capital thus there is no
possibility of hiring a chartered accountant to maintain their accounts. The recording
is improper and which can give false image of the SME.
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Information Asymmetry ( Non- disclosure of Significant information )
Non-disclosure of significant information. Firm being rated may not provide
significant or material information, which is likely to affect the investor’s decision as
to investment, to the investigation team of the credit rating company. Thus any
decisions taken in the absence of such significant information may put investors at a
loss.
Low budget ( Financing)
Not all business finance is external/commercially supplied through the market. Much
finance is internally generated by businesses out of their own earnings and/or supplied
informally as trade credit, that is, delays in paying for purchases of goods and
services. insufficient capital can also derail even the best-laid plans. It's vital to have
enough working capital to survive that period.
Lack of access to finance and timely credit as well as escalating cost are cited as the
primary reasons for under-utilisation of the manufacturing capabilities of SMEs.
Tax and regulation
A multiplicity of regulating agencies lead to harassment and inspections with greater
impact on operations of SMEs than on larger units.
Technology
It becomes difficult for SMEs to access cutting-edge technology due to the high
initial costs, thus leaving them behind in the race for competitiveness. A major
impediment in SME development is their inability to access timely and adequate
finance.
On cash transaction are not shown in the balance sheet
For a business that does not sell on credit, and pays bills as they are incurred, it may
be all that is necessary. The cash basis records only cash transactions, making the cash
account a crude measure of how well the business is performing..
In sme, mostly because of the low capital, the chartered accountant is not adopted to
take care of financial statement and balance sheet. Their is no compulsion to display
that balance sheet to public. According to the interview I came to know that on cash
transactions are not shown in the balance sheet of SME .thus which will adversely
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affect the cash balance account of the sme. When cash transactions are NOT recorded
in balance sheet, the cash/bank account in the balance sheet remains the same. the
inflow and outflow of cash is not recorded. This may give false hope to the CRA
about cash/bank account of the SME
Management Evaluation is critical to rate
-No layer of professional manager
SME is not like large corporates with layer of professional manager in every
department. The main and best person to consult is the entrepreneur of the sme
itself.sme lack in the management part because of the less management employees.
b) Lack of Formal Procedure and Discipline
Most SMEs do not have formal procedure or often these are not documented.
Furthermore, there is tendency for these procedures to change frequently. This makes
it difficult for third party and newcomer to understand the existing business practices
and match them with the IT process.
CHAPTER 10
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OBSERVATION / FINDINGS
After working for two months I have observed that in addition to Working Capital
Finance and Term Finance, Bank of Baroda has laid out a comprehensive suit of
products specifically catering to SME Borrowers. Loans and Advances offered by
Bank are as follows
Working capital finance ,term finance , MSME ,Baroda SME loan Pack, Baroda
Vidyasthali Loan, Baroda arogyadham loan, Baroda Laghu udhyami credit card,
Baroda Artisans credit card, Barods weavers credit card,Technology upgradation fund
scheme for textile and jute industries,Crdit linked capital subsidy scheme for SSI
units,Composite loans, Collateral Free Loans Under Guarantee Scheme Of Credit
Guarantee Fund Trust For Micro And Small Enterprises, SME short term loans,SME
medium term loans, Baroda SME gold card, Scheme for financing energy efficiency
projects, Baroda overdraft against land and building,Prime minisiter’s employment
generating programme, Loans Under Interest Subsidy Eligibility Certificate Scheme
of Khadi & Village Industries Commission (KVIC-ISEC), Baroda MSME Capex
Card & Baroda MSME Capex Loan,Small business borrowers
According to the annual report (2013) of bank of baroda the following points
were observed
Total Business (Deposit+Advances) increased to Rs 8,02,069 crore reflecting a
growth of 19.3% (y-o-y)
Credit-Deposit Ratio stood at 82.03% as against 86.86% last year
MSME Credit posted a growth of 30.3% constituting 19.7% of your Bank’s Gross
Domestic Credit in FY13
Capital adequacy ratio (CAR) ae per basel 2 stood at 13.30%
Bank opened five new SME Loan Factories at Indraprastha (New Delhi), Anand,
Bhopal, Junagarh, and Jalandhar – taking the total of SME loan factories to 52 across
India. The ‘loan-factory’ model is a pioneering concept introduced by your Bank to
ensure better quality of credit appraisal, reduced turn-around time and improved
volumes – thereby enabling your Bank to increase its MSME lending without
sacrificing the quality of credit.
Bank has already planned the SME Loan Factories, Specialized SME Branches and
MSME cells at various branches for the fiscal year FY14.
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Bank actively participated in various exhibitions and seminars during FY13 to build
brand image of the Bank in MSME financing.
Bank also celebrated the MSME Festival during Jan-Mar 2013 to encourage staff at
the SME Loan Factories and branches to re-double efforts at canvassing new business
According to the study it was seen as bank of Baroda does internal rating to only
existing customers. More than 20 SME’s are rated and provided credit by bank of
Baroda.
Memorandum of understanding was sign between CRISIL and BOB in 2001.
The ratings is done by BOB itself but the software is provided by CRISIL
According to the study, it was seen that BOB is not biased against any particular
sector. There is no discrimination between sme and other sectors.
The rating symbol of Bank of Baroda is
BOB 1-Highest Safety
BOB 2-High Safety
BOB 3-Adequate Safety
BOB 4-Moderate Safety
BOB 5-Moderate Risk
BOB 6-High Risk
BOB 7-Very High Risk
SME sector is given more important as it is for the growth of small and medium scale
enterprises and for the economy.
Ratings are not a guarantee against loss.
Credit ratings are assigned to companies through Credit rating agency.
The rating given by the agency is very important for:
- Investor
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- Issuer
- Financial Intermediaries
- Business counter-parties
- Regulators
These days people refer to 3 different credit ratings agencies in order to make correct
decision of investment.
Issuer can Appeal to the credit rating agency if they would not satisfy with the ratings
Converting a Bad Credit Rating into Good Credit Rating
Even if past mistakes have brought your company to the despair and the credit rating
is very poor, you always have the chances to improve. However, to rebuild the credit
rating, your financial management team should have all the relevant in formation with
it. There are several computer software programs available in the market that helps a
lot in this regard. Law also permits to convert the bad credit rating in to good credit
rating and repairing the damage done by poor credit rating. According to latest
regulations, credit bureaus have to wipe out negative remarks from
your organizations' credit report after a certain period of time. You can argue with
them regarding any information that you feel objectionable. They have to delete it if
they cannot verify such information
.
CHAPTER 12
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LIMITATION
In India the growth of credit rating agencies are seen, but at some point of time it may
decline and the credit rating companies may end up shutting down.
Indian markets always welcome the new technology, but when the customers are not
satisfied with the technology, it is ignored. Thus the company end up with loses.
Same is the scene with credit rating agencies because of the following reasons
Credit rating is pure manual process so the manipulation can be done easily
Except financial risk, management risk and other risk can be lowered and the
company can be given high rating.
Even after receiving high rating, the financial institution won’t provide the loan
without their own formalities.
So less preference will be given even if the company is highly credit rated company.
This upset’s the customers as after investing money and getting the high rating, they
are still not able to get the credit facility from the market. Thus the growth of the
credit rating company will decline considerably.
CHAPTER 13
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CONCLUSION
The project undertaken has helped a lot in gaining knowledge of the “Credit rating
services provided by credit rating agencies and why external rating favour large
corporates than sme sector” in Nationalized Bank with special reference to Bank of
Baroda. Credit rating of the Bank which is also known as internal rating has become
very vital in the smooth operation of providing credit to its customer. Credit rating
Policy of the Bank provides the framework to determine (a) whether or not the
company is rated enough in all aspects to provide credit (b) how to rate the company
(c) Do they favour particular sector or not. The Project work has certainly enriched
the knowledge about the effective management of “Credit Rating” and “Credit Rating
Process” in banking sector and other Credit rating agencies.
The credit market turmoil that began in the U.S. in the summer of 2007 has been
amplified in recent months by dramatic slowing of broader economic activity. What
began as a significant, but relatively isolated, deterioration in the performance of sub-
prime housing loans has led to a wave of negative events that have reverberated
across a highly-leveraged, interconnected and, at times, opaque global financial
system. More importantly, a credit crisis has transformed into a much wider and
deeper crisis of confidence in the global markets. Credit rating agencies have an
opportunity to help restore confidence in markets by restoring confidence in our
industry.
Credit Rating Policy” and “SME Sector” is a vast subject and it is very difficult to
cover all the aspects within a short period. However, every effort has been made to
cover most of the important aspects, which have a direct bearing on improving the
financial performance of Banking Industry.
To sum up, it would not be out of way to mention here that Bank of Baroda has given
special inputs on “Credit Rating” and “Credit rating Policy for SME sector”. In
pursuance of the instructions and guidelines issued by the Reserve Bank of India,
Bank of Baroda is granting and expanding credit to all sectors.
The concerted efforts put in by the Management and Staff of Bank of Baroda has
helped the Bank in achieving remarkable progress in almost all the important
parameters.
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SUGGESTION
Suggestion for bank of Baroda is that they should increase the credit facility for sme
sector and provide loans to as many as sme sector as they can. Because of the
following reasons
The Kingfisher Airlines currently has a staggering debt of Rs 7,500 crore. One of its
many lenders is the state-run Bank of Baroda (BOB), whose share of the amount is Rs
550 crore.
When we compare this to the bad loans given by BOB to all the micro, small and
medium enterprises (MSMEs) in the country put together. BOB's gross bad loans to
MSMEs amounted to Rs 1,100 crore, or 3.2 per cent of its total loan of Rs 34,500
crore to the entire sector.
Thus BOB's bad loans with just one big company Kingfisher Airlines, are half its non-
performing assets with thousands of MSMES.
MSMEs are risky but the risk is diversified as you are lending to small businesses in
different sectors.- R.K. Bansal, General Manager, SME and Wealth Management,
BOB
Within the MSME segment, RBI guidelines prescribe 60 per cent of bank loans
should go to micro enterprises.
Top-rated SMEs should get interest concession of up to one per cent
BIBLIOGRAPHY
http://businessworld.in/en/storypage/-/bw/financing-smes-an-industry-perspective/
r391725.37542/page/0#sthash.OOzCdUZ9.dpuf
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http://businessworld.in/en/storypage/-/bw/financing-smes-an-industry-perspective/
r391725.37542/page/0#sthash.OOzCdUZ9.dpuf
http://businessworld.in/en/storypage/-/bw/financing-smes-an-industry-perspective/
r391725.37542/page/0#sthash.OOzCdUZ9.dpuf
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