SMERA RATINGS

SME Financing
Making Finance for Indian Small Businesses

Parag Patki, CEO

WHY LOW CREDIT TO THE MSME SECTOR?

Information Asymmetry

Asymmetry

Irregularity Lop-sided-

Supply of Information
Un-Reliability

Impact/Reasons

Information Asymmetry

Finance Source No Finance/Self Finance Finance through Institutional Sources Finance through Non-Institutional Sources Total

Registered 87.77

Unregistered 93.08

1.02 100

2.12 100
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Source: Fourth All-India Census of Micro, Small & Medium Enterprises with reference year of 2006-07

Theme-Todays Discussions
Information Asymmetry

Sub-Optimal Credit Decisions

Can SME Ratings Reduce Information Gap leading To

Informed Decisions/Risk Diversification/Higher Earnings/Lower NPAs

Defined
Asymmetry Genesis:
Borrowers Inability and/Or Willingness to share information Lack of Awareness/Financial Literacy/ Clarity/Technocracy

Information Asymmetry

Small enterprises Micro enterprises

Medium enterprises

Large corporate

High symmetry

Low symmetry
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Challenges in MSME Sector

Information Asymmetry

Inadequate Information
E.g. Timeliness, completeness and accuracy of filings/financial statements

Filing & Assessing Quality

Lack of appropriate accounting practices (more than one balance sheets etc.) Lack of appropriate skill sets to assess.

Issues of Scale
High transaction Governance etc. cost, Management constraints, Financial infrastructure,

Exhibition of strengths. eg: show less turnover; taxmen are un-likely to cometh calling/ Loans to MSMEs turn into NPA

Mindset

Exposing banks to the perils of lending in a competitive; albeit less informative environment
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Causes and Results

Borrower
Posses more Information than the Lender Reluctance to Share the Information In ability to Project the Right Information

Information Asymmetry

Causes

Lender
Posses less information at a Sector/Geography/Cluster level Compounding of Opaqueness by Consultants Adequate Skillset

Impact on Borrower

Inadequate Credit Higher Cost

Higher NPA Lack of Risk Based Pricing Higher Cost of Assessing Rejection of Good Proposals Inadequate Credit Flow Deterioration in Asset Quality Adverse Economic Effect

Impact on Banker

Impact on System

Is there an answer?

Information Asymmetry

Can CRAs Bridge the Information Divide And Enable Informed Decision Making ?

Value of Information "Rule of Thumb

One Dollar of Information Generates $ 1,000 of Credit

Ratio: 1:1,000
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Using MSME ratings..

Informed Credit Decisions

SME Credit Rating Agencies (CRAs) Institutions specialized

in providing a risk opinion

MSME CRAs have information across sectors, clusters,

geographies and rating categories

CRAs have access to proprietary models and lineage in

evaluating the SME space

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SMERA A few highlights

Although SME ratings are not mandatory, SMERAs ratings have wide lender and borrower acceptability

SMERAs rating experience

SMERA also recently conducted a default study for its SME ratings (available at

www.smera.in) , the results indicate that higher rating categories show lesser
incidence of default.

SMERA Ratings Assigned

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How do MSME ratings enable this?

Detailed analysis of

Informed Credit decisions

Ability of the enterprise to generate cash flows - Business Information, Customer and supplier analysis, employee strength Ability of the enterprise to manage cash flows Facility details, historic financial analysis Competence of the managers and generators of the cash flows Business relationships, management evaluation, group company analysis etc.

Detailed analysis through

Specialized personnel and analysts Rating committee approach Established models Benchmarking and cross industry and geography comparison Detailed management interaction Site Visits, Management discussion and meeting
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Ratings enable greater transparency in MSMEs

On Corporate Governance

As financial records are unreliable, SMERA relies on all information available regarding the SME; some noteworthy points include: Site Visit Enables cross verification with financial statements

Bank Statement Verification Gives an accurate and more importantly timely picture of liquidity Management Discussion Bureau Verification Performed by analysts rating the cases Promoter/owner evaluation through an established third party Electricity bills, Supplier Customer feed back feedback,
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Other Qualitative Checks

A few highlights
A unique amalgam of Lenders, Development Institution and Technical Experts

SMERAs rating experience

Our Experience
SMERA is a seven year old institution specialising in SME ratings, till date we have assigned over 19,000 ratings in the MSME domain
Our Major shareholders

SIDBI Indias principal financial Institution for the promotion, financing and development of the MSME sector Dun and Bradstreet The worlds leading source of global business information, knowledge and insight. Various public and private Sector banks State Bank of India, ICICI, Union Bank of India, Bank of Baroda, Standard Chartered Bank, Bank of India, Punjab National Bank, Canara Bank, Indian Bank, Oriental bank of commerce
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From Asymmetry to Informed Decision-Journey

Credit Ratings 3-Fold Advantage:
1.Reduce Information Asymmetry 2.Provide insights for informed credit decisions 3.Comfort and Un-biased third party opinion

MSME Ratings-Journey

High symmetry Low symmetry

Medium Enterprises

Large Corporate

Small Enterprises
Micro Enterprises

It is Joint Collaborative Journey Government+ Lenders + Rating Agencies

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Benefits of SMERA Rating

21% of units received interest rate benefit

17% of units have received enhancement in credit limits

Processing time of application for credit reduced in 12% of cases

7 to 8% of units received reduction of collateral /security

40 % Increased confidence in overseas customers/suppliers

SMERAs advice to MSMEs Better to be rated than non-rated

MSME ratings - A useful tool in profitable lending and economic growth

Conclusion

Information Asymmetry leads to sub-optimal credit decisions And SMERA Ratings can reduce this information gap
leading to

Optimal lending and MSME development

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.for the time and the opportunity

Thank you

Warm Regards, SMERA team

www.SMERA.in

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