about care importance of credit rating for msmes council/rc south jan...importance of credit rating...
TRANSCRIPT
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About CAREImportance of Credit rating for
MSMEs
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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
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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.
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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
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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
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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
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Product Basket
Bank Loan Ratings
SME Ratings
SME Fundamental Grading
Due Diligence Services
Channel Partner Evaluation/Verification Services
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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
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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)
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SME Rating Model
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SME Rating Model
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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.
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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
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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
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The actual benefits availed by Rated MSMEs
Based on FY13 rated universe of care ratings
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Thank you