Small

ICRA LimitedAn Associate of Moody’s Investors

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ASSOCHAM – MSME Innovation Summit

Presentation byICRA Limited

(An Associate of Moody’s Investors Service)

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About ICRA• An Associate of Moody’s in India• Large Indian shareholders include SBI, LIC, PNB, IFCI• Over 15 years of domestic rating experience• Over 3300 ratings assigned so far• Ratings across sectors

– Manufacturing– Infrastructure– Banking & Finance– Public Finance– Project Finance– Corporate Governance

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MSME Sector in India

• MSME growth rate consistently higher than the overall industrial sector growth rate

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05

SSI Gr Indl Gr

Source : Ministry of SSI, Government of India

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Source : Third Census of Small Enterprises (2001 - 02)

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Lending to MSMEs

• From lenders’ perspective- A large market and hence a large exposure- However, declining SSE share in banking sector credit

Source: Ministry of SSI, GoI

-

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

31.03.2000 31.03.2001 31.03.2002 31.03.2003 31.03.2004 P 31.03.2005 P

0%

2%

4%

6%

8%

10%

12%

14%

16%

Net bank credit (Rs. crore) SSI credit (Rs. crore) SSI % NBC

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MSME Sector in India• Micro Small and Medium Enterprise Development

Act, 2006 passed– Classification of industries

For Manufacturing Concerns (Investment in Plant and Machinery)

For Service Industry (Investment in Equipment)

Micro Enterprise upto 25 Lacs Upto 10 Lacs

Small Enterprise 25 Lacs till 5 Crore 10 Lacs till 2 Crore

Medium Enterprise 5 Crore till 10 Crore 2 Crore till 5 CroreAs defined under Schedule 1 of Industries ( Development and Regulations ) Act, 1951

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Key Characteristics of Indian MSMEs• Resilience• Spread across industry at different stages of maturity• Major concentration in clusters• Information asymmetry• Lacking in infrastructure support w.r.t

– Energy needs– Marketing and branding– Skilled manpower– Institutional finance– No clear policies for exit for ensuring capital efficiency

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Role for innovation

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Nature of innovation• Radical vs. Incremental – product positioning and /

or achieving cost efficiencies

• Quality and servicing related – branding

• Across functions or for key competencies – existing capability enhancement.

• Through use of technology and ICT

• Existing or for new areas – diversification opportunity or need

• Timing – proactive or responsive

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MSME Expectations & Challenges in MSME lending

What MSMEs want?• Timely sanction and availability• Enough for running daily

operations• At affordable terms• Lesser collateral and security

margin• A lender who understands

MSME business and financial needs

Lending Challenges

• Information asymmetry• Diverse clients with diverse

needs• Lacking evaluation expertise

with limited information and diverse nature of operations

• High transaction cost• Legacy of high defaults

10

Dr. Chakraborty Committee: Finance 10 new accounts p.a. per semi-urban / urban branch

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MSME PERFORMANCE AND / CREDIT RATINGS

• Benefits to the MSME:- Comparative self-assessment:

- where do you stand vis-à-vis other comparable entities?

- what is the improvement in own performance?- A measure of capability and credibility; a tool for

marketing- A cost saving tool; can be used for negotiating with

- Bankers- Vendors- Customers

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MSME Performance and Credit Ratings• Benefits to lenders:

- Objective assessment by credible and neutral third party- Allows comparison of risk within the pool of credits- Risk rating and capital allocation (rating can be mapped to banks’

internal scale)- Determining the terms of lending – interest rate, collateral, tenure- Detailed rating rationale enhancing credit assessment of MSMEs

• Overall, for the sector, greater penetration of ratings by a credible agency will– reduce information asymmetry– improve transparency in business practices– improve competitiveness

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ICRA Ratings for MSMEs• ICRA-NSIC SSI Performance & Credit Rating

– Evolved in co-ordination with NSIC– Entities registered with NSIC– Rates distinctly, separately on

• Performance Capability (viz., scale ‘1’ to ‘5’)• Financial Strength (viz., scale ‘A’ to ‘C’)

• ICRA MSME Rating– Relative assessment of credit risk in comparison with other

MSMEs– Composite scale for ranking debt servicing ability

• Not issue ratings, but issuer ratings

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Need for specific MSME Rating model• Some research findings internationally:

– MSMEs show credit characteristics that are distinct from large businesses

– MSMEs are riskier but have a lower asset correlation with each other than large businesses do

– Quantitative default predictor models used for large corporates not as effective with middle market and small credits

– Quantitative variables not sufficient to predict MSME default and that qualitative variables are useful in improving a model’s predictive power

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ICRA MSME / SSI Rating model• An in-depth understanding of the economy after 15 years of

rating experience• Model based on -

- own expertise and database- discussions with various banking sector players and

consultants on their understanding about the sector- international research on the sector, including Moody’s

models for emerging economies• While model based approach, ICRA rating process allows for

dynamic qualitative parameters that reflect sector specific / management / transparency issues.

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ICRA Rating Process• Mandate letter and initial information requirements in the

specified format• ICRA team meeting with the management, including plant /

office visit• Partnership approach in collecting information and data• Presentation of detailed assessment to Rating Committee• Assignation of Rating• Communication to lender / issuer along with Rating Rationale

– strengths and other factors separately highlighted• Validity of Rating is for a year• Surveillance, at specific request

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ICRA Rating Scales

• ICRA-NSIC SSI Performance & Credit Rating

Performance CapabilityHighest High Moderate Weak Poor

High SE 1A SE 2A SE 3A SE 4A SE 5AModerate SE 1B SE 2B SE 3B SE 4B SE 5BLow SE 1C SE 2C SE 3C SE 4C SE 5C

Financial Strength

Rating Scale Parameters:•Financial Strength•Performance Capability

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ICRA SME Rating ScaleICRA SME 1 : Highest-credit-quality rating assigned by ICRA to an SMEICRA SME 2 : High-credit-quality rating assigned by ICRA to an SMEICRA SME 3 : Adequate-credit-quality rating assigned by ICRA to an SMEICRA SME 4 : Moderate-credit-quality rating assigned by ICRA to an SMEICRA SME 5 : Inadequate-credit-quality rating assigned by ICRA to an SMEICRA SME 6 : Risk-prone-credit-quality rating assigned by ICRA to an SMEICRA SME 7 : Poor-credit-quality rating assigned by ICRA to an SMEICRA SME 8 : Lowest-credit-quality rating assigned by ICRA to an SME

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Thank you Contact : Ankush Sharma

ICRA Online Limited011-23357490-50, 9999970456

[email protected]@icraonline.com