Credit rating firms now target small enterprises

March 6th, 2009 - 12:38 pm ICT by IANS  

Chennai, March 6 (IANS) As the economic downturn bites and banks become more reluctant to lend to firms that do not have credit ratings, credit rating agencies are aggressively expanding to provide ratings for at least some of India’s 12.8 million small and medium enterprises (SMEs).

It is estimated that only about two percent of SMEs in India get financing from banks.

The recent entry of ICRA Ltd into the small and medium enterprises (SMEs) rating sector seems to have heated up competition in the credit rating business, with existing market leaders, SME Rating Agency of India Ltd and Crisil Ltd, also chalking out strategies to tap the market potential.

ICRA announced its entry into the SME rating space March 2 by forming a special purpose vehicle ICRA Online Ltd for the purpose.

“We have set up a specialist SME credit rating cell in Chennai. Initially we will focus on the southern region and scale our operations nationwide,” ICRA Online executive director Rajesh Dubey told IANS.

By hiring Dubey, who was heading the rival firm SMERA till December, ICRA sent a tough message to its competitors.

The credit rating market is increasing at a higher speed with the banks now insisting that their SME borrowers, with a credit exposure of Rs.50 million and above, get rated.

For the banks, lending to a rated SME would reduce their capital charge as against lending to an unrated SME.

“In our estimate, the addressable market will be SMEs with a turnover of over Rs.4 million (Rs.40 lakh) and their numbers will be around 80,000 in India,” SMERA chief executive Parag Patki told IANS from Mumbai on phone.

Rating agencies charge their fees based on the turnover or the credit exposure limit of the units they rate.

The fees are in the range of Rs.30,000-150,000 for fresh rating and it will be lower in case of renewals, officials said.

Talking about strategies to win clients in a highly competitive atmosphere, Dubey said ICRA Online would target companies that have invested between Rs.50 million and Rs.100 million in plant and machinery sector or companies with a turnover of over Rs.300 million (Rs.30 crore).

“Our pricing will be in the range of Rs.50,000-Rs.150,000, depending on the client. We are in the process of finalising the charging metrics - whether to base our fees on the turnover or the credit exposure of the SME,” he added.

Patki said SMERA will set up regional teams for better penetration while peer review will be held in Mumbai.

Now, SMEs located in southern India rank at the top followed by those in western, northern and eastern parts of the country.

However, SMEs are wary of the possible negative impact of credit rating. While a higher rating may lower their interest cost, a low rating may have an opposite effect, officials said.

“Credit rating will be helpful for really large SMEs. For small units, the cost-benefit ratio does not work in favour as the annual savings in interest pay-out is far less than the fee charged by the rating agencies,” K. Gopalakrishnan, managing partner of electrical switchgear maker Trans Gears, told IANS.

D.E. Ramakrishnan, chief managing director of Chennai-based Paramount Group Ltd, said credit rating would bring more SMEs under the banking network.

“Out of the 128 lakh (12.8 million) SME units (in the country), only two percent are under the banking fold. Credit rating may be a way for financial inclusion,” he told IANS.

However, he added that rating model should fit all SMEs and the rating fee should be lower than what is being charged now.

According to banking officials, the rating charges would not be an issue for companies. “The rated SMEs can recoup the rating fee from reduced interest pay outs,” Indian Bank chairman and managing director M.S. Sundara Rajan said.

Dubey, however, added that reating SMEs will be a little challenging for the agencies.

“Big corporates are system-driven and have people. So we can get the required data in the required format. In the case of SMEs many are dependent on their auditors. We have to interact with their auditors to get the required data,” he said.

(Venkatachari Jagannathan can be contacted at v.jagannathan@ians.in)

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