Friday, January 14, 2011

Credit Ratings Need Pragmatic Approach: A cogent Analysis

Article in SMEWorld Jan 2011 Issue

Independent agencies are present world over that are involved in rating the creditworthiness of a nation as a whole or of firms in specific. The aim is to evaluate the health of an enterprise in a holistic fashion thereby establishing its soundness. A positive credit rating helps in boosting the image of a firm which leads to possible investments or availability of loans or financing.

In layman's terms – it is the analysis of a firm's ability to pay back any debt either by cash or other movable or immovable assets.

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The concluding part of the above article has been published in the March Issue of SMEWorld.

Need for Credit Rating in SMEs in India – Ground Reality
Last month in an article titled “Need for Credit Rating in SMEs in India – A cogent analysis”, the claims of credit rating agencies were highlighted. In this concluding part, the discussion is continued with a specific focus on the banks’ standpoint with regards to credit rating and the ground reality.
What do the banks say?
It is established fact now that finance is the most important prerequisite for any SME to function smoothly. All other factors are directly related to the availability of loans, capital and funds.
Most rating agencies as presented in the previous section claim that they are recognized by banks and financial institutions and getting a rating done by them would help in availing loans easily. The best way of analyzing the veracity of such claims is by presenting the actual text from selected banks’ website. For brevity’s sake, the presentation is restricted to three well known banks in India. It is left to the readers to draw their own conclusion.

(a) State Bank of India
The FAQs section has the following question:
What are the eligibility criteria for these term loans?
The SSI unit that takes the loan should not have any history of defaults in payment of interest or installments of the principal. The unit should have a strong performance record and a respectable credit rating as per the bank’s own credit assessment scales (In case of loan above Rs. 25 lakhs).
(Source: retrieved on 06.12.2010)

(b) Axis Bank
The following line is an excerpt from a page on Microfinance in the Axis bank website.
“Note: All loans are at the sole discretion of the Bank.”
(Source: retrieved on 06.12.2010)
The following excerpt is from the Basel – II Disclosures document available on Axis bank website.
(Source: retrieved on 06.12.2010)
Page No. 6
Credit risk in respect of exposures on corporate and micro and small and medium enterprises (MSME) is measured and managed at individual transaction level as well as portfolio level. Credit rating tools are an integral part of risk-assessment of the corporate borrowers and the Bank has developed different rating models for each segment that has distinct risk characteristics viz. Large corporates, MSME, small traders, financial companies, micro-finance institutions, project finance etc.
Page No. 7 Credit Rating System
The Bank has developed rating tools specific to market segment such as large corporates, mid-corporates, SME, financial companies and microfinance companies to objectively assess underlying risk associated with such exposures. For retail and schematic SME exposures, scorecards and borrower-scoring templates are used for application screening. The credit rating tool uses a combination of quantitative inputs and qualitative inputs to arrive at a 'point-in-time' view of the rating of counterparty. The monitoring tool developed by the Bank helps in objectively assessing the credit quality of the borrower taking into cognizance the actual behaviour post-disbursement. The output of the rating model is primarily to assess the chances of delinquency over a one-year time horizon.
Page 8 Credit Risk Asset Quality
The rating tool for SME has an 8-point rating scale, which ranges from SME 1 to SME 8. The Bank has separate rating tools for financial companies and schematic SME exposures.

(c) Bank of Baroda
The following excerpt is from Bank of Baroda’s SME Policy document:
Page 8 and 9 Point no. 10
Credit rating:
Internal Credit Rating System
The internal comprehensive credit rating system under CRISIL Model has been approved by the bank and is already in place as advised to all branches. Pricing of loan to be decided based on the guidelines issued from time to time.
External Credit Rating System
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. Our Bank has entered into MOU with SMERA, CRISIL and Dun & Bradstreet to get our SME borrowers rated at concessional rate. External credit rating should be carried out in all Medium Enterprise accounts going for expansion and fresh sanction involving exposure above Rs 5.00 crores by the agencies approved by RBI. Pricing be continued to be linked to our internal credit rating system. However, due weightage will be given for the credit rating of the external agency.
(Source: retrieved on 06.12.2010)
The following excerpt is from the SME Short Term Loans page on the bank’s website:
SME Short Term Loans
ENTERPRISES GROUP: Micro, Small & Medium Enterprises as per Regulatory definition and all other entities with annual sales turnover of Rs. 1/- crore to Rs. 150/- crores.
Eligibility Criteria
• Satisfactory credit rating for the last three years
• Latest Balance Sheet etc. should be available.
• Satisfactory financial performance in terms of sales / turnover and profits. Negative variance, if any, should not be more than 10%.
• Satisfactory dealings with the Bank for at least three years.
(Source: retrieved on 06.12.2010)
HDFC Bank’s Working Capital Finance section in their website does not state any requirement for credit rating. It rather lists the documentation required to avail the facility with a final line “Any other documents as required by the bank at a later stage”
(Source: retrieved on 09.12.2010)
ICICI Bank also does not state any specific credit rating requirements in its Business Advantage Loan section.
Source: retrieved on 09.12.2010)
The Code of Bank’s Commitment to Micro and Small Enterprises May 2008 document by Banking Codes and Standards Board of India ( available on SBI’s website has the following excerpts:
(Source: retrieved on 06.12.2010)
Page 9 5.2 Credit Assessment (Only the relevant points have been presented)
a. We will
ii) Before lending you any money, or increasing your overdraft or borrowing limit/s, assess whether you will be able to repay it. We shall carry out proper assessment of your loan application by carrying out detailed due diligence and appraisal.
b. This assessment may include looking at the following
i) Information you give us, including the purpose of borrowing.
ii) Your business plan.
iii) Your business’s cash flow, profitability and existing financial commitments supplemented, if necessary, by account statements.
iv) Your personal financial commitments.
v) How you have handled your finances in the past.
vi) Information we get from credit reference agencies.
vii) Ratings assigned by reputed credit rating agencies, if any.
viii) Information from others, such as other lenders /creditors.
x) Any security provided.

Ground Reality
It is established that SMEs need financing and banks or financial institutions can provide so but only after due diligence and evaluation of the enterprises’ ability to repay the same. The independent credit rating agencies provide services to enterprises wherein they can get their business evaluated and get an unbiased overall report. The importance and role of independent credit rating agencies in India cannot be negated. The lenders might not always depend on these third party ratings to decide whether or not to disburse the loan to a SME but a positive rating can definitely provide credibility to the enterprises. This is especially useful when banks or NBFCs conduct their own analysis of the health of an enterprise. Secondly, credit rating exercise can help enterprises understand their lacunae and get their house in order. Since these third party agencies are not part of any single lender, hence their evaluation process is much more generic and all-encompassing. This will help ensure that an enterprise is compliant to the requirements of more than one lender and thereby increase their chances of financing from one source or the other.
A general view that has evolved from the analysis of the requirements for becoming eligible for loans is a clean track record of repayment of any loan apart from organized account books and regular payment of statutory duties and taxes. The timely payment to creditors as well as receipt from debtors also is indicative of good health. An internal management control system further strengthens the firms’ strategies and processes.
A development in this decade is that of the Credit Information Bureau (India) Limited (CIBIL). It is a Government of India and RBI initiative to cleanse the “financial system” in the country and focus on defaults and non-payments. The participating banks share detailed information on borrowings, lending and their history. Thus, an individual or entity cannot continue to default on loans and still get further benefits from other lending agencies. The shareholding pattern of CIBIL has evolved from four original firms namely SBI, HDFC, D&B and TransUnion International Inc. to most of the leading banks in the country. A detailed shareholding pattern pie chart can be viewed from
When a loan is applied for by an individual or entity, the concerned lending agency makes a CIBIL database check to identify the history of repayment, number of credit facilities, outstanding amount, willful defaulter etc. If the CIBIL record comes out clean then the chances of receiving the loan is highly likely.
SMEs in India today need one such agency possibly an off-shoot of CIBIL to rate enterprises such that the same is acceptable to most or all banks and financial institutions in India. One standardized format of documentation should be created comprising of the best practices from all banks such that compliance of which is suitable to all. This is more like the Schengen visa that is applicable for all EU nations which allows the holder to move freely from one country to another without requiring multiple visas. The aim of the lenders should be to ease the lending process for SMEs alongwith ensuring that the loan is safe. Even the backbone of the economy needs positive health and support for well-being.

All material collected and referenced from various websites; have been duly mentioned in the relevant sections with the retrieval date.
Any inadvertent slip-ups are highly regretted and are purely unintentional. The views are solely that of the author as an individual.
(Updated on 10.03.2011)


  1. My loan was rejected. Credit Sudhaar was my choice. Initially they were slow. But their counsellors were able to handle all my queries. I will give Credit Sudhaar a positive review

  2. I had no idea my credit was bad. The guys at Credit Sudhaar analysed my report. The process took some time but my credit was restored, enhanced and protected. I have no reason for complaints.