Summer Project Final

A

PROJECT REPORT

ON

“Comparative study of credit rating services offered by CRISIL, CARE, ICRA, FITCH with

reference to SME sector”

FOR

Bank Of Baroda (Worli)

MASTER OF MANAGEMENT STUDIES (MMS)

UNIVERSITY OF MUMBAI

SUBMITTED TO

SINHGAD INSTITUTE OF BUSINESS MANAGEMENT

CHANDIVALI

UNDER THE GUIDANCE OF, SUBMITTED BY

PROF. SREELATHA CHINU R. KWATRA

BATCH-2012-14

ROLL NO-93

SPECIALIZATION-FINANCE

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CERTIFICATE

This is to certify that __________________________________has successfully

completed the project work as a part of academic fulfillment of Masters of

Management Studies (M.M.S.) Semester II examination.

Name & Signature of Project Guide

Date : _________________

DIRECTORSIBM

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DECLARATION

I, Chinu R. Kwatra of Master of Management Studies Semester 3 of Sinhgad Institute

of Business Management (SIBM), hereby declare that I have successfully completed

this Project on Comparative study of credit rating services offered by CRISIL, CARE,

ICRA, FITCH with reference to SME sector in the academic year 2012-2014

The information incorporated in this project is true and original to the best of my

knowledge.

_____________________________

Signature

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ACKNOWLEDGEMENT

It is my pleasure to be indebted to various people, who directly or

indirectly contributed in the development of this work and who influenced my

thinking, behavior, and acts during the course of study.

I express my sincere gratitude to Dr. Meera Vijay, the director for

providing me an opportunity to undergo summer training at Bank of Baroda

I am thankful to Mr.Jayesh Kothari (AGM), Mr. Pankaj (Senior

Manager), Miss Jnanashree (Officer) for their support, cooperation, and motivation

provided to me during the training for constant inspiration, presence and blessings.

I also extend my sincere appreciation to Prof. Sreelatha who provided her

valuable suggestions and precious time in accomplishing my project report.

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PREFACE

As a part of the MBA Circulam and in order to gain practical Knowledge in the field

of management, we are required to make a report on “Comparative study of credit

rating services offered by CRISIL, CARE, ICRA, FITCH and to study reasons as to

why external rating favour other sectors than SME sector” The Basic Objective

behind doing this project report is to get knowledge different tools of finance.

In this project report I have included various services offered by top credit rating

agencies of India and also compared their services. In this project we will also see the

rating procedure, methodology adopted by credit rating agencies. Here, we will study

about the sme sector, the bank’s approach towards sme sector, sme products of the

bank last but not the least we will study why external rating favour Big companies

than sme sector

Doing this Project report helped me to enhance my knowledge regarding the work

done in the bank. I gained knowledge about sme sector, loans and advances, credit

rating done by banks, various policies adopted by bank. It was the live experience

which helped me to enhance my knowledge in banking sector

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INDEX

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EXECUTIVE SUMMARY

Bank of Baroda’s principal activities are to provide banking and related services

through 4,284 branches in India and 93 overseas branches. The services include

accepting deposits, commercial and institutional credit, project finance, treasury,

forex, investment and risk management and other related financial services. As a part

of my M.M.S curriculum I have taken my summer training in Bank Of Baroda

(Worli). As per the topic SMEs-Growth engines for Indian economy, I have analyzed

SSI Sector of India with the help of various web sites related to this sector and other

related sources like journals, files etc.

Here, the overall project is based on analysis of Small and Medium enterprises and the

external rating agencies like Crisil, Care, Icra, Ind-ra. On the investment front, Indian

small businesses are acting on their positive economic outlook with increased capital

investment in the first half of 2008. A majority of the SMEs in the country are

planning to hire more workers while none intended to cut jobs.

The insight of the project report shows the services offered by Credit rating agencies,

rating methodology, rating process, bank’s approach to SME sector, SME products of

Bank of Baroda and reasons stating why Bank favour other sector over SME

sector.“No. 1challenge for SMEs is increasing competition followed by pricing-

pressure in the market and managing customer expectations

STATEMENT OF THE PROBLEM

The project talks about the comparative study of the services offered by Credit rating

agencies like CRISIL, CARE, ICRA AND FITCH and will also discuss why external

rating favour big companies than SME sector. External rating favouring large

companies than sme sector is the problem which will be discussed in the project

SIGNIFICANCE OF THE STUDY

The proposed report will determine the common services provided by credit rating

agencies like CRISIL,CARE,ICRA AND FITCH. This study is also important

because the services are compared, the result of which gave rise to few different

services . The report is important as it discuss why external rating favour large

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companies than sme sector. It also shows that Bank of Baroda who does internal

rating for its customer does not discriminate between large and sme sector.

PURPOSE OF THE STUDY

Banking industry is one of the fastest growing industries in the world. Bank of Baroda

is the bank which is declared as best bank and best public sector banker in the award

ceremony held in 2012.the purpose of the study is to understand the banking system

which not only handle deposits and withdrawal of money but many larger aspect. The

main goal of the project is to learn the credit rating done in bank of Baroda, on what

aspects the customers of bank of Baroda are rated and which are the crucial segment

they see while funding their customers

OBJECTIVES

- To study the credit rating agencies, their services.

- To compare the services offered by CRA

-To study the methodologies of rating provided by CRISIL, CARE, ICRA and IND-

RA (FITCH)

- To analyze and study the reasons, why external rating favour Big companies than

SME sector.

SCOPE AND RATIONALE OF THE STUDY

The study describes the detail comparison of the services rendered by the credit

agencies like Crisil, Care, Icra and Fitch. I will be studying the credit rating agencies,

how do they function, what are the roles of credit rating agencies, what is the

procedure of rating a particular company. With external rating, I will also study about

the internal rating done by bank of Baroda and on what parameters the companies are

rated. I will be studying how this rating helps the companies to grow their business.

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Main objective of the study is to understand the services of credit rating agencies and

make a comparison between them and to find out the reason why external ratings are

not in favour of Small and Medium Enterprises segment.

RESEARCH METHODOLOGY

The study of the project was conducted with the help of primary sources and various

secondary sources as explained below:

(1) PRIMARY SOURCES

For the primary data, I interviewed officers of Bank of Baroda Was provided

with the following information.

Rating methodology

Rating process

Difference between external rating and internal rating

(2) SECONDARY SOURCES

I have collected the secondary data from the various Government institutions

site like RBI, E-books on credit rating agencies. Files of the cases handled by

bank of Baroda, Pdf’s available on internet, web sites of Crisil, Care, Icra and

Ind-Ra (Fitch).

PERIOD OF THE STUDY

8th May, 2013 To 8th July, 2013 (2 Months)

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CHAPTER 1

INTRODUCTION TO BANK OF BARODA

1.1 COMPANY PROFILE

It all started with a visionary Maharaja's uncanny foresight into the future of trade and

enterprising in his country. On 20th July 1908, under the Companies Act of 1897, and

with a paid up capital of Rs 10 Lacs started the legend that has now translated into a

strong, trustworthy financial body, THE BANK OF BARODA.

The founder, Maharaja Sayajirao Gaekwad, with his insight into the future, saw "a

bank of this nature will prove a beneficial agency for lending, transmission, and

deposit of money and will be a powerful factor in the development of art, industries

and commerce of the State and adjoining territories."

It has been a long and eventful journey of almost a century across 25 countries.

Starting in 1908 from a small building in Baroda to its new hi-rise and hi-tech Baroda

Corporate Centre in Mumbai, is a saga of vision, enterprise, financial prudence and

corporate governance.

It is a story scripted in corporate wisdom and social pride. It is a story crafted in

private capital, princely patronage and state ownership. It is a story of ordinary

bankers and their extraordinary contribution in the ascent of Bank of Baroda to the

formidable heights of corporate glory. It is a story that needs to be shared with all

those millions of people - customers, stakeholders, employees & the public at large -

who in ample measure, have contributed to the making of an institution

1.2 MISSION STATEMENT

To be a top ranking National Bank of International Standards committed to

augmenting stake holders' value through concern, care and competence.

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1.3 LOGO

Our new logo is a unique representation of a universal symbol. It comprises dual ‘B’

letterforms that hold the rays of the rising sun. We call this the Baroda Sun

1.4 ACHIEVEMENT

Bank of Baroda awarded Best PSU Bank Award for the year 2011-12

Bank of Baroda Receives Award for Excellence in Financial Reporting

Bank of Baroda conferred Best Public Sector Bank Award

Bank of Baroda bags The Sunday Standard FINWIZ 2012 Awards

Bank of Baroda won 2 awards at The Sunday Standard FINWIZ 2012 in the

following category:

Best Indian Bank – Large (Runner up)

Best Public Sector Banker – Large (Runner up)

Bank of Baroda bags Best Public Sector Bank Award by CNBC TV18-‘India

Best Banks and Financial Institutions Awards 2012’

Bank of Baroda bags Forbes India Leadership Award

Most Efficient Bank in Kenya-11.06.2011

Business World Best Bank 2011 Awards

Fastest Growing Bank- Large

Banker of the Year to Shri M D Mallya, Chairman & Managing Director.

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CHAPTER 2

2.1 INTRODUCTION

2.1.1 CREDIT RATING AGENCIES

With the increasing market orientation of the Indian economy, investors value a

systematic assessment of two types of risks, namely “business risk” arising out of the

“open economy” and linkages between money, capital and foreign exchange markets

and “payments risk”. With a view to protect small investors, who are the main target

for unlisted corporate debt in the form of fixed deposits with companies, credit rating

has been made mandatory. India was perhaps the first amongst developing countries

to set up a credit rating agency in 1988. The function of credit rating was

institutionalised when RBI made it mandatory for the issue of Commercial Paper (CP)

and subsequently by SEBI. When it made credit rating compulsory for certain

categories of debentures and debt instruments. In June 1994, RBI made it mandatory

for Non-Banking Financial Companies (NBFCs) to be rated. Credit rating is optional

for Public Sector Undertakings (PSUs) bonds and privately placed non-conve11ible

debentures upto Rs. 50 million. Fixed deposits of manufacturing companies also come

under the purview of optional credit rating.

2.1.2 MEANING AND DEFINITION

Credit rating is the opinion of the rating agency on the relative ability and willingness

of tile issuer of a debt instrument to meet the debt service obligations as and when

they arise. Rating is usually expressed in alphabetical or alphanumeric symbols.

Symbols are simple and easily understood tool which help the investor to differentiate

between debt instruments on the basis of their underlying credit quality. Rating

companies also publish explanations for their symbols used as well as the rationale for

the ratings assigned by them, to facilitate deeper understanding.

In other words, the rating is an opinion on the future ability and legal obligation of the

issuer to make timely payments of principal and interest on a specific fixed income

security. The rating measures the probability that the issuer will default on the

security over its life, which depending on the instrument may be a matter of days to

thirty years or more. In fact, the credit rating is a symbolic indicator of the current

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opinion of the relative capability of the issuer to service its debt obligation in a timely

fashion, with specific reference to the instrument being rated. It can also be defined as

an expression, through use of symbols, of the opinion about credit quality of the issuer

of security/instrument.

2.2 FUNCTIONS OF A CREDIT RATING AGENCY

A credit rating agency serves following functions:

1. Provides unbiased opinion: An independent credit rating agency is likely to

provide an unbiased opinion as to relative capability of the company to service debt

obligations because of the following reasons: i. It has no vested interest in an issue

unlike brokers, financial intermediaries. ii. Its own reputation is at stake.

2. Provides quality and dependable information:. A credit rating agency is in a

position to provide quality information on credit risk which is more authenticate and

reliable because: i. It has highly trained and professional staff who has better ability to

assess risk. ii. It has access to a lot of information which may not be publicly

available.

3. Provides information at low cost: Most of the investors rely on the ratings

assigned by the ratings agencies while taking investment decisions. These ratings are

published in the form of reports and are available easily on the payment of negligible

price. It is not possible for the investors to assess the creditworthiness of the

companies on their own.

4. Provide easy to understand information: Rating agencies first of all gather

information, then analyse the same. At last these interpret and summarise complex

information in a simple and readily understood formal manner. Thus in other words,

information supplied by rating agencies can be easily understood by the investors.

They need not go into details of the financial statements.

5. Provide basis for investment: An investment rated by a credit rating enjoys higher

confidence from investors.

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Investors can make an estimate of the risk and return associated with a particular rated

issue while investing money in them.

6. Healthy discipline on corporate borrowers: Higher credit rating to any credit

investment enhances corporate image and builds up goodwill and hence it induces a

healthy/ discipline on corporate.

7. Formation of public policy: Once the debt securities are rated professionally, it

would be easier to formulate public policy guidelines as to the eligibility of securities

to be included in different kinds of institutional port-folio.

2.3 SEBI GUIDELINES FOR CREDIT RATING AGENCIES

SEBI vide CIR/MIRSD/CRA/6/2010 dated May 3, 2010 has provided for certain

transparency and disclosure norms for the Credit Rating Agencies (“CRAs”). The

major measures taken in this regard are summarized below:

1. CRAs should maintain records of the rating committee, including voting details and

notes of dissent, for a period of five years.

2. It has been made mandatory for CRAs to publish information about the historical

default rates of their rating categories and whether the default rates of these categories

have changed over time.

3. CRAs should ensure that its analysts do not participate in any kind of marketing

and business development, including negotiations of fees with the issuer whose

securities are being rated. Also, the employees involved in the credit rating process

and their dependants cannot own shares of the issuer.

4. CRAs while rating structured finance products, are barred from providing

consultancy or advisory services regarding the design of the structured finance

instrument. This prohibition would apply to the subsidiaries of CRAs too. While

publishing the ratings of structured finance products and their movements, CRAs

apart from following all the applicable requirements in case of non-structured ratings

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should also disclose the track record of the originator and details of nature of

underlying assets while assigning the credit rating.

5. In case of unsolicited credit ratings (the credit ratings not arising out of the

agreement between the CRAs and the issuer), credit rating symbol should be

accompanied by the word “UNSOLICITED” in the same font size.

6. CRAs should also disclose (i) the policies, methodology and procedures in detail

followed by them regarding solicited and unsolicited credit ratings, (ii) the history of

credit rating of all outstanding securities, (iii) the general nature of its compensation

arrangements with the issuers and (iii) the details of any relationship it has with the

issuer whose securities are being rated and any of its associate of such issuer and the

CRAs or its subsidiaries.

SEBI commented that the recent events in global financial system have underlined the

pivotal role that credit ratings play. Effective use of credit ratings by the users is

crucially dependent upon quality and quantity of disclosures made by the CRAs.

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CHAPTER 3

CREDIT RATING AGENCIES IN INDIA

Credit Rating Information Services of India Limited (CRISIL)

CRISIL is a global analytical company providing ratings, research, and risk and

policy advisory services. It is India's leading ratings agency and also the foremost

provider of high-end research to the world's largest banks and leading corporations.

With sustainable competitive advantage arising from our strong brand, unmatched

credibility, market leadership across businesses, and large customer base, they deliver

analysis, opinions, and solutions that make markets function better.

They empower customers, and the markets at large, with independent analysis,

benchmarks and tools. These help lenders and borrowers, issuers and investors,

regulators, and market intermediaries make better-informed investment and business

decisions. Their offerings allow markets and market participants to become more

transparent and efficient - by mitigating and managing risk, taking pricing decisions,

generating more revenue, reducing time to market and enhancing returns

Credit Analysis & Research Ltd. (CARE)

CARE Ratings commenced operations in April 1993 and over nearly two decades, it

has established itself as the second-largest credit rating agency in India. With the

rating volume of debt of around Rs.45,901 bn (as on December 31, 2012) , CARE

Ratings is proud of its rightful place in the Indian capital market built around investor

confidence. CARE Ratings has also emerged as the leading agency for covering many

rating segments like that for banks, sub-sovereigns and IPO gradings.

CARE Ratings provides the entire spectrum of credit rating that helps the

corporates to raise capital for their various requirements and assists the investors to

form an informed investment decision based on the credit risk and their own risk-

return expectations. Our rating and grading service offerings leverage our domain and

analytical expertise backed by the methodologies congruent with the international best

practices.

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India Ratings & Research (IND-RA) -FITCH

India ratings & research (ind-ra) is India’s most respected rating agency committed to

providing the India’s credit markets with accurate, timely and prospective credit

opinions. Built on a foundation of independent thinking, rigorous analytics, and an

open & balanced approach towards credit research, ind-ra has grown rapidly during

the past decade gaining significant market presence in India’s fixed income market.

Ind-ra currently maintains coverage of corporate issuers, financial institutions, which

includes banks and insurance companies, finance & leasing companies and managed

funds, urban local bodies and project finance.

Ind-ra has six offices in India located at Mumbai, Delhi, Chennai, Bangalore,

Hyderabad and Kolkata. Ind-ra is recognised by the securities and exchange board of

India, the reserve bank of India and national housing bank.

Internet Content Rating Association (Icra)

ICRA Limited (formerly Investment Information and Credit Rating Agency of India

Limited) was set up in 1991 by leading financial/investment institutions, commercial

banks and financial services companies as an independent and professional

Investment Information and Credit Rating Agency.

Today, ICRA and its subsidiaries together form the ICRA Group of Companies

(Group ICRA). ICRA is a Public Limited Company, with its shares listed on the

Bombay Stock Exchange and the National Stock Exchange.

Alliance with Moody’s Investors Service

The international Credit Rating Agency Moody’s Investors Service1 is ICRA’s largest

shareholder. The participation of Moody’s is supported by a Technical Services

Agreement, which entails Moody’s providing certain high-value technical services to

ICRA. Specifically, the agreement is aimed at benefiting ICRA’s in-house research

capabilities, and providing it with access to Moody’s global research base.

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CHAPTER 4

Comparative study of services Offered by

CRISIL, CARE, ICRA and FITCH

CRISIL CARE ICRA IND-RA

(FITCH)

STRUCTURED

FINANCE

- Bonds/ LT

instruments

- CPs/ ST instruments

- PTCs/ SF instruments

- non convertible

debentures

- All Structured

Finance

STRUCTURED

FINANCE

- Bonds/ LT

instruments

- CPs/ ST instruments

- PTCs/ SF

instruments

- ABS

- CMBS

- RMBS

- Structured Credit

STRUCTURED

FINANCE

- ABS

- MBS

- CDO

- FFT

- PGS

STRUCTURED

FINANCE

- All Structured

Finance

- ABS

- CMBS

- RMBS

- Structured Credit

- Operational Risk

Group

SME RATINGS SME RATINGS SME RATINGS SSI/SME RATING

REAL ESTATE

RATINGSREAL ESTATE

RATING

REAL ESTATE

GRADING

NIL

PUBLIC FINANCE

RATING

PUBLIC FINANCE

RATING

- Urban Local Bodies

- State Government

PUBLIC FINANCE

- State government

- Local Bodies

PUBLIC FINANCE

- Corporations

- Municipal

corporations

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- Other Local Bodies

RESEARCH

-Economy Research

-Industry Research

-Company Report

-Customised Research

RESEARCH

- Industry Research

- CARE Industry Risk

Metrics

- Customized

Research

RESEARCH

- Industry Research

NIL

CAPITAL MARKET

& FINANCIAL

MARKET

-Banks

-Non Banking

-Asset Manangement -

Companies

Insurance

- Crisil equities

- Mutual fund research

- Indices-iisl

FINANCIAL

SECTOR RATING

- Banks

- Non Banking

- Financial Company

- Housing Finance

Company

- Insurance Rating

- Mutual Fund

FINANCIAL

SECTOR RATING

- Banks

- NBFCs

- Housing finance

company

-Mutual Fund

- Claims paying

ability rating

(Insurance)

FINANCIAL

INSTITUTIONS

- Banks/ NBFCs

- Asset Management

Companies

- Insurance

INFRASTRUCTURE PROJECT

FINANCE RATING

PROJECT

FINANCE

RATING

INFRASTRUCTURE

& PROJECT

FINANCE

CORPORATE

- Debt Rating

- Recovery Risk Rating

- Bank loan Rating

CORPORATE

- Corporate Debt

Rating

- Bank loan Ratings

CORPORATE

- Long term

- Medium term

- Short term

CORPORATE

- Long term Debt

- Medium-Term Notes

- Commercial Paper

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- Governance & Value

Creation

- Fund Rating

- Financial Strength

Rating

- Bank Loan Ratings

(Basel II)

- Issuer Rating

- Corporate

- Governance Rating

- Recovery Rating

Bank loan rating

- Corporate

governance rating

- Preferred Stock

- Bank Loan Rating

GRADING

- Maritime Gradings

- MFI Gradings

- Broker Quality

Gradings

- Business school

gradings

GRADING

- Construction

Grading

- Shipyard Grading

- Edu-Grade

- Real Estate Project

- Star Rating

- IPO Grading

- EquiGrade

- RESCO Grading

- MFI Grading

GRADING

-Grading of IPO

-Solar power grading

- Micro finance

institution

- Construction

grading

- Maritime grading

- Health care grading

- Financial strength

grading

- Engineering

colleges/ universities

- Management

education institutes

GRADING

- Solar Grading

- IPO Grading

EQUITY RESEARCH

SERVICES

EQUITY

RESEARCH

SERVICES

EQUITY

RESEARCH

SERVICES

EQUITY RESEARCH

SERVICES

OTHER SERVICES

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GLOBAL

RESEARCH

& ANALYTICS

- Investment Banking

Research

- Credit Research

- Retail Brokerage

Research

- Derivatives off

shoring

- Financial Technology

- FX and Economics

- Quantitative

Analytics

- Commodities

Research

- Risk and Actuarial

Services

- Private Wealth

Management

- Insurance Actuarial

Services

-Retail Risk Analytics

CONSULTING

SERVICES

ICRA Management

Consulting Services

Limited (IMaCS)

CREDIT MARKET

RESEARCH

EXECUTIVE

TRAINING

PROJECT CREDIT

RATING

Rating process of the rating companies like CRISIL, CARE, ICRA & FITCH.

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CHAPTER 5

There is a common rating process followed by all the above mentioned credit rating

companies. The process is explained below in detail

Explanation of Fig .1

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ISSUER CREDIT RATING COMPANY

REQUEST FOR RATING

SIGNS RATING AGREEMENT PROVIDES

INFORMATION AND RATING FEES

MANAGEMENT INTERACTIONS WITH THE

RATING TEAM

ACCEPTS THE RATING OR

APPEAL

RATING TEAM ASSIGNED.

TEAM COLLECTS INFORMATION, CONDUCTS PRELIMINARY ANALYSIS.

TEAM CONDUCTS VISITS AND PERFORMS ANALYSIS.

ANALYSIS PRESENTED TO RATING COMMITTEE.

RATING ASSIGNED AND COMMUNICATED TO

ISSUER

RATING DISSEMINATED AND CARRIED IN

WEBSITE

ALL RATINGS KEPT UNDER CONTINUOUS SURVEILLANCE

THROUGHOUT VALIDITY

ISSUER REQUEST FOR A REVIEW AND PROVIDES

FRESH INPUTS

ACCEPTED

NOT ACCEPTED

Fig. 1

Rating is a multilayered decision making process. The process of rating starts with

a rating request from the issuer, and the signing of a rating agreement. The rating

agreement has important clauses like confidentiality, agreement by the issuer to

share information with the CRA for the purpose of assigning the rating and

thereafter on an ongoing basis when the rating is under surveillance.

The rating agency undertakes discussion with the management of the issuing

entity. Discussions during a management meeting are wide-ranging, covering

competitive position, strategy, financial policy, historical performance, and near-

and long-term financial and business outlook.

Discussions with company managements help rating analysts evaluate management

capability and risk appetite, which is an important aspect of the evaluation. After

discussion with the issuer's management, a report is prepared detailing the analyst

team‘s assessment of the business risk, financial risk, and management risk

associated with the issuer.

The report is then presented to the rating committee. This is the only aspect of the

process in which the issuer does not directly participate.

Drawing on the knowledge and expertise of the participants, the rating committee

determines the rating.

The process is an attempt to ensure objectivity of the rating, since the decision

results from the collective thinking of a group of experts analysing the risks

pertaining to the issuer and its competitors in the industry and markets in which

they operate.

On finalisation of a rating at the rating committee meeting, the rating decision is

communicated to the issuer.

As the decision to get an initial rating is at the issuer's discretion (except, in India,

for public issues of debt), the global best practice is to allow the issuer to decide

whether to accept the rating.

If the issuer disagrees with the rating, it can also appeal for a fresh look at the

rating assigned. The rating committee then discusses the information submitted; it

may or may not decide to modify the rating, depending on the facts of the case.

If the rating is not changed and the issuer continues to disagree with the rating, it

can choose not to accept the rating, which then does not get published.

CHAPTER 6

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SME SECTOR

6.1 INTRODUCTION

The small and medium enterprises today constitute a very important segment of

the Indian economy. The development of this sector came about primarily due to the

vision of our late Prime Minister Jawaharlal Nehru who sought to develop core

industry and have a supporting sector in the form of small scale enterprises. SMEs

sector has emerged as a dynamic and vibrant sector of the economy. Today, it

accounts for nearly 35% of the gross value of output in the manufacturing sector and

over 40% of the total exports from the country. In terms of value added this sector

accounts for about 40% of the value added in the manufacturing sector. The sector's

contribution to employment is second highest next to agriculture.

The SMEs sector has grown rapidly over the years. The growth rates during the

various plan periods have been very impressive. The number of small-scale units has

increased from an estimated 6.79 million units in the year 1990-91 to over 13 million

in the year 2007-08. When the performance of this sector is viewed against the growth

in the manufacturing and the industry sector as a whole, it instills confidence in the

resilience of the SMEs Essector.

The SME segment is broadly classified as under

Particulars Investment in Plant & Machineries in case of Manufacturing Enterprises

Investment in Equipment in case of Service Sector Enterprises

Micro Enterprises Upto Rs. 25/- lacs Upto Rs.10/- lacs

Small Enterprises Above Rs. 25/- lacs and upto Rs.500/- lacs

Above Rs.10/- lacs and upto Rs.200/- lacs

Medium Enterprises Above Rs.500/- lacs and upto Rs.1000/- lacs

Above Rs.200/- lacs and up to Rs.500/- lacs

6.2 MANUFACTURING AND SERVICE SECTOR

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The micro, small and medium enterprises in manufacturing and

service sector are defined as under in MSMED act, 2006.

MANUFACTURING SECTOR Micro Enterprise (Manufacturing) is an enterprise engaged in

manufacture/production or preservation of goods and whose investment in plant and

machinery (original cost excluding land and building and the items specified by the

Ministry of Small Scale Industries) does not exceed Rs. 25.00 Lacs irrespective of

location of the unit.

Small Enterprise (Manufacturing) is an enterprise engaged in

manufacture/production or preservation of goods and whose investment in plant and

machinery (original cost excluding land and building and the items specified by the

Ministry of Small Scale Industries) is more than Rs. 25.00 lacs but does not exceed

Rs. 5.00 crores and

Medium Enterprise (Manufacturing) is an enterprise engaged in

manufacture/production or preservation of goods and whose investment in plant and machinery (original cost excluding land and building and the items specified by the

Ministry of Small Scale Industries is more than Rs.5.00 crores but does not exceed

Rs.10.00 crores.

SERVICE SECTOR Enterprises engaged in providing or rendering services whose investments in

equipment (original cost excluding land & Building and Furniture, Fittings and other

items not directly related to the service rendered or as may be notified under MSMED

Act, 2006) are as detailed here under:

Micro Enterprise (Service) is an enterprise where the investment in equipment does

not exceed Rs. 10.00 lacs;

Small Enterprise (Service) is an enterprise where the investment in equipment is

more than Rs.10.00 lacs but does not exceed Rs. 2.00 crores and

Medium Enterprise (Service) is an enterprise where the investment in equipment is

more than Rs. 2.00 crores but does not exceed Rs. 5.00 crores.

6.3 COMPOSITION OF SME SECTOR

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The SME Sector includes Micro Enterprises, Small Enterprises, Artisans & Village

Industries, Medium Enterprises, Service Sector units & individual sub-sector units.

Micro Enterprises

Micro Enterprises are those engaged in manufacturing, processing, preservation of

goods, mining, quarrying, servicing & repairing of specified type of machinery &

equipment, agro service units whose investment in Plant and Machineries does not

exceed Rs. 25.00 lacs irrespective of location of the unit in respect of manufacturing

units and investment in equipments not exceeding Rs 10.00 lacs in respect of Service

Sector units.

Small Enterprises:

A Small Enterprise industrial undertaking / unit is one which is engaged in the

manufacture, processing or preservation of goods or is a servicing and repair

workshop undertaking repairs of machinery used for production, mining or quarrying

or custom service unit (except water service units), having investment in Plant and

Machineries (original cost) above Rs 25.00 lacs but not exceeding Rs. 5.00 crores in

respect of manufacturing unit and above Ra 10.00 lacs but not exceeding Rs 2.00

crores in respect of Service Sector unit.

Medium Enterprises

A Unit which is engaged in the manufacture, processing or preservation of goods or is

a servicing and repair workshop undertaking repairs of machinery used for

production, mining or quarrying or custom service unit (except water service units),

with investment in Plant & Machinery in excess of Rs 5.00 crores and upto Rs.10.00

crores in respect of manufacturing units and investment in equipments in excess of Rs

2.00 crores and upto Rs 5.00 crores in respect of Service Sector units will be treated

as Medium Enterprises (MEs).

Khadi and Village Industries Sector (KVI)

All advances granted to units in the KVI sector, irrespective of their size of

operations, location and amount of original investment in Plant and Machinery.

CHAPTER 7

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7.1 BANK OF BARODA’S APPROACH TO SME SECTOR

SMEs are growth engines for development of Economy.

BOB has therefore for internal purposes given focused attention to finance all

Commercial enterprises i.e. enterprises which may be outside the purview of

regulatory definition of SME but having turnover upto Rs 150.00 crores and

new infrastructure and real estate projects where the project cost is upto Rs.

50/- crores by treating them as part of SME segment.

SME Banking business will thus include the following across the bank:

Micro, Small and Medium Enterprises – as per regulatory definition

irrespective geographical location, i.e. rural, semi-urban, urban, metro areas.

All other entities with their annual sales turnover of Rs. 1/- crore to Rs. 150/-

crores and new infrastructure and real estate projects, where the project cost is

upto Rs. 50/- crores.

SMEs which are Associate/sister concerns of Wholesale Banking customers.

Clubs, Trusts, etc.

Financing under various Government schemes launched for MSME Sector.

However, such units, which are outside the purview of regulatory definition

will not form part of Priority Sector lending.

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7.2 CODE OF BANK’S COMMITMENT TO MICRO & SMALL

ENTERPRISES (MSE CODE) BOB is a member of The Banking Codes and Standards Board of India (BCSBI), who

has formulated Code of Bank‟s Commitment to Micro & Small Enterprises which has

been adopted by BOB. This Code sets minimum standards of banking practices for

banks to follow when they are dealing with Micro & Small Enterprises (MSEs) as

defined in the Micro, Small & Medium Enterprises Development (MSMED) Act,

2006.

The MSE Code broadly covers the following areas: Objectives of the Code

Commitment of banks to the customers

Information regarding availability of interest rates, tariff schedule etc.

Privacy and confidentiality

Lending methods

Collection of dues

Features pertaining deposit accounts

Services offered

Complaints, grievances and feed back (bank‟s internal procedures and Banking

Ombudsman Scheme)

Products and services

Protection to customers

The Code will be reviewed within a period of 3 years. The Code does not replace or

supersede regulatory guidelines issued by RBI/bank from time to time.

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The focal points which banks are expected to comply with in the area of lending.

Banks to make available free of cost, simple, standardized and easy to understand

application forms for loans to MSEs.

All loan applications should be acknowledged in writing.

All loan applications should be disposed off within the stipulated time as under

from the date of receipt of application complete in all respects and accompanied by

documents as per the check list:

For credit limits upto Rs. 2/- lacs Within 2 weeks

For credit limits upto Rs. 5/- lacs Within 4 weeks

For credit limits exceeding Rs. 5/-

lacs

Within a reasonable time frame (4

weeks)

It should be ensured that sanctioned loans are disbursed within 2 working days from

the date of compliance of all terms and conditions of sanction/documentation.

In case of rejection of application, reasons for rejection should be conveyed in

writing to the applicant for credit facilities.

No collateral security should be insisted upon for credit limits upto Rs. 10/- lacs.

To provide working capital limits to Micro & Small Enterprises (Manufacturing)

on the basis of minimum of 20% of projected turnover.

No processing charges to be recovered if loan upto Rs. 5/- lacs is not sanctioned.

To follow credit rating system, the parameters of which should be shared with the

borrowers.

To permit prepayment of loans upto Rs.5/- lacs without levying any pre-payment

penalty.

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7.3 SME PRODUCTS IN BANK OF BARODA

The following products are launched for SME sector across the country:

Baroda SME Gold Card providing additional 10% facility over the assessed

MPBF for meeting emergent business requirements.

Baroda SME Loan Pack providing single line of credit for meeting SME

borrowers‟ working capital as well as long term requirements within the overall limit

approved by the bank as per the eligibility, i.e. 4.5 times of borrower‟s tangible net

worth as per last audited Balance Sheet, or Rs. 5/- crores, whichever is lower.

Baroda Overdraft against Land & Building is a unique product for financing

working capital requirements, long term margin requirements of SME borrowers

against the security of unencumbered land and building belonging to the unit, or,

promoters of the unit, upto a maximum limit of Rs. 5/- crores depending on the

location, viz. rural and semi-urban, urban and metro.

Baroda Vidyasthali Loan providing finance to Educational Institutional upto a

limit of Rs. 10/- crores on liberalized terms. This scheme is implemented at select

branches of the Bank depending on the business potential.

Baroda Arogyadham Loan for providing finance for setting up new Nursing

Homes, Hospitals including Pathological Laboratories, renovation of existing Nursing

Homes/Hospitals, purchase of medical diagnostic equipments as also office

equipments etc. and to meet working capital requirement upto a maximum limit of

Rs.12/- crores, depending on the location, on liberalized terms. This scheme is also

implemented at select branches of the bank.

Scheme for financing existing SME customers/Current Account holders for

purchase of new vehicles upto a limit of Rs. 50/- lacs with 10% margin.

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CHAPTER 7.4

RATING METHODOLOGY FOR SME SECTOR

Ratings on SME reflect the rated entities overall creditworthiness, adjusted in relation

to other SMEs. These ratings are entity-specific, and not specific to debt issuances.

Outlined below is the rating methodology used to assess the creditworthiness of SMEs

with on-going business units and without any large projects. The rating methodology

for assessment under both rating scales is the same. The methodology is

comprehensive and covers three broad categories of risk – business risk, management

risk, and financial risk.

SR

NO. BUSINESS RISK MANAGEMENT RISK FINANCIAL RISK

1

Assessing the sustainability of the business plan

Management evaluation is an evaluation of the promoters’ competence.

Accounting Standards by ICAI and guidelines of the companies’ act.1956 must be followed.

2

Qualitative assessments of the track record of the business

SME rating depends on the entrepreneurship and resourcefulness of the promoters

Analysis is based on disclosed financial statements

3

Assessing the quality of an SME’s relationship with its key customers.

CRA’s looks at the past performance of the entity and group companies

Bankers are contacted to assess the nature and history of the relationship and performance of the loans and bank accounts.

4

To assess the entity’s manufacturing facilities

Assesses the organisational structure of the entity and the quality of its systems and processes

The ratio calculations are fine-tuned to suit the requirements of the SME sector

5

Assessing the quality of an SME’s relationship with its suppliers

Assessment of an SME’s financial risk profile also attempts to assess the entity’s financial flexibility.

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7.5 CREDIT RATING FOR SME SECTOR IN BANK OF BARODA

(i) Internal Credit Rating System

The internal comprehensive credit rating system under BOBRAM (CRISIL) Model

has been approved by the bank and is already in place as advised to all branches. The

BOBRAM model is applicable to MSME accounts having exposure of above Rs. 2

Crores.

Board in their meeting dated 02.07.2009 has approved introduction of New Scoring

Card type of Model for rating the MSME accounts with exposure of Rs. 25 Lac to Rs.

2 Crore.

As per extant guidelines, periodicity of credit rating in respect of borrowal accounts

enjoying credit facilities (Fund Based and Non Fund Based) of Rs.5 crores and above

is half yearly and in other accounts on annual basis. Pricing of loan to be decided

based on the guidelines issued from time to time.

(ii) External Credit Rating System (NOT ELIGIBLE UNDER BASEL-II

NORMS OF CAPITAL ADEQUACY)

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.

M/s. CRISIL, the pioneer of independent credit rating agencies in India, has entered

into an agreement with M/s. National Small Industries Corporation who has recently

introduced a credit rating scheme for encouraging units to get them rated by reputed

credit rating agencies.

BOB has entered into MOU with credit rating agencies viz: M/s CRISIL, Dun &

Bradstreet, SMERA to get our SME borrowers rated.

(iii) External Credit Rating System (UNDER BASEL-II NORMS OF CAPITAL

ADEQUACY)

External Credit Rating should be carried out in all SME loan accounts with credit

limits of above Rs 5 crores by any one of the RBI approved external credit rating

agencies. Presently ICRA, CARE, CRISIL and FITCH are the only Reserve Bank of

India approved external credit rating agencies in India. The exposure to SME

borrower rated by any of these rating agencies will be recognized as rated exposure

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for the purpose of computation of Risk Weighted Assets under Standardized

Approach of credit risk under Basel-II guidelines.

Pricing be continued to be linked to our internal credit rating system. However due

weightage will be given for the external credit rating by the external rating agency.

According to the study, it was seen no discrimination was done between large

companies and sme sector. The company dint favours any segment for rating. The

internal rating of BOB was done for the existing customers only.BOB worli branch

rated 20-25 SME’s and provided loans to many. Credit rating was done by BOB itself,

only the software of rating was provided by CRISIL as in 2001 Crisil and BOB signed

a MOU.

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7.6 LOAN TO SMES

Salient features of the Credit Guarantee Fund Trust for Micro and Small

Enterprises (CGTMSE)

o The eligible loan limit under the Scheme is now Rs.100 lakhs.

o The credit guarantee cover has been raised from 75% to 85% for the

following category of loans:

a. Loans to Micro enterprises upto Rs. 5 lakh; and

b. Loans to Micro and Small enterprises operated and/ or owned by

women.

o The coverage of the Scheme will now be extended to all new and existing

Micro and Small Enterprises (both in the Manufacturing Sector as well as

Service Sector).

INTEREST RATES ON MICRO ENTERPRISES ADVANCES

TYPE OF ADVANCEREVISED RATE OF INTEREST ON

ADVANCES W.E.F. 1st  AUGUST 2011- %AGE PER ANNUM

  BASE RATE = 10.75%Size of the limit of the Micro Enterprises

IMaCS Rating Grade

Rate Of Interest

Up to Rs 50000 N.A Base Rate +1.75%    = 12.50%Above Rs 50000 but up to Rs 2.00 Lacs

N.A Base Rate +2.50%   =  13.25%

Above Rs 2.00 Lacs but up to Rs 25.00 Lacs

N.A Base Rate + 2.75%   = 13.50%

Above Rs.25.00 lac and up to Rs.1.00 crore

1 Base Rate +2.50%   =  13.25%2 Base Rate + 3.00%   = 13.75%3 Base Rate + 4.00%  =  14.75%

Below 3 Base Rate + 5.00%  = 15.75%Above Rs.1.00 crore 1 Base Rate + 2.75%   = 13.50%

2 Base Rate + 3.00%   = 13.75%3 Base Rate + 4.00%  =  14.75%

Below 3 Base Rate + 5.50%   = 16.25%

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CHAPTER 8

CHALLENGES FOR SME SECTOR Medium Enterprises (SMEs) play a very significantSME’s role in the economy is in terms of balanced and sustainable growth,

employment generation, development of entrepreneurial skills and contribution to

export earnings. However, despite their importance to the economy, most SMEs are

not able to stand up to the challenges of globalisation, mainly because of\ difficulties

in the area of financing. With the opening up of the Indian economy, it has become

necessary

to consider measures for smoothening the flow of credit to this se

The biggest challenge for SMEs in India are-

Effective financial management both for running of the organization as well as for

expansion activities taking in to consideration the global competition.

Raising funds from financial institutions like banks, NBFCs for SMEs are till date a

big challenge.

It is estimated that only 16% of Indian SME sector have been given bank /institutions

support and the rest of the sector is unable to get support. The main reason for these

lacunae is, not having efficient management tools in place, lack of knowledge of

banking guidelines, ineffective mechanism to weigh the credit worthiness of the

company.

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8.1 IMPORTANCE OF CREDIT RATING FOR SME SECTOR

The rating scale places very imminent role in determining the quantum of loan to be

provided to the company.

For ex; if the company is doing in par with the industry and they want to rapidly

expand, the banker may have their discretion to sanction the amount taking in to

consideration the industry, management, capability of the company etc and banker

may sanction full money requested for expansion or they may ask the management to

slow down in their expansion by reducing the capex(Capital Expenditure)

investment.

Very high rating for the company will definitely have an upside benefit of interest rate

reduction from anywhere between .5% -1.5%, which may give substantial benefit for

the company and it may increase the company’s profitability.

An reduction of 1% interest rate for the loan of 2 crores may give the benefit of close

to 2 lacs benefit for the company, which will be directly adding to the bottom line of

the company(PAT-Profit after tax)

CHAPTER 9

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EXTERNAL RATINGS FAVOUR OTHER SEGMENT THAN

SME SECTOR

Large Corporates

Large Corporates has dedicated full time IT staff with specific expertise to manage

specific applications or parts of the IT infrastructure. They have departments like

marketing, human resource, finance etc. Large corporate have huge investment,

infrastructure and assets.

It’s easy to rate large corporate because it has organised information on industries,

market shares, competition dynamics and promoter or management track record.

Large companies with strong and stable cash flows are likely to be rated higher than

small companies with more volatile cash flows

Due to this the large Corporates are favourite of external rating. Credit rating agencies

favour large Corporates because they are high on capital and the information is easily

accessible. They can also pay higher fees to get their company rated.

The reasons why external rating do not favour sme sector are as follows:-

Speculated balance sheets

A balance sheet is a snapshot of a company's financial status. This document contains

all of company's financial activity over the past fiscal year. The company, investors,

the stock market and the public typically refer to a company's balance sheet to gauge

whether a company is healthy or in decline. The ability to determine the integrity and

quality of a balance sheet is vital to make accurate business decisions.

The SME’s are the enterprises with lack of infrastructure and capital thus there is no

possibility of hiring a chartered accountant to maintain their accounts. The recording

is improper and which can give false image of the SME.

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Information Asymmetry ( Non- disclosure of Significant information )

Non-disclosure of significant information. Firm being rated may not provide

significant or material information, which is likely to affect the investor’s decision as

to investment, to the investigation team of the credit rating company. Thus any

decisions taken in the absence of such significant information may put investors at a

loss.

Low budget ( Financing)

Not all business finance is external/commercially supplied through the market. Much

finance is internally generated by businesses out of their own earnings and/or supplied

informally as trade credit, that is, delays in paying for purchases of goods and

services. insufficient capital can also derail even the best-laid plans. It's vital to have

enough working capital to survive that period.

Lack of access to finance and timely credit as well as escalating cost are cited as the

primary reasons for under-utilisation of the manufacturing capabilities of SMEs.

Tax and regulation

A multiplicity of regulating agencies lead to harassment and inspections with greater

impact on operations of SMEs than on larger units.

Technology

It becomes difficult for SMEs to access cutting-edge technology due to the high

initial costs, thus leaving them behind in the race for competitiveness. A major

impediment in SME development is their inability to access timely and adequate

finance.

On cash transaction are not shown in the balance sheet

For a business that does not sell on credit, and pays bills as they are incurred, it may

be all that is necessary. The cash basis records only cash transactions, making the cash

account a crude measure of how well the business is performing..

In sme, mostly because of the low capital, the chartered accountant is not adopted to

take care of financial statement and balance sheet. Their is no compulsion to display

that balance sheet to public. According to the interview I came to know that on cash

transactions are not shown in the balance sheet of SME .thus which will adversely

38 | P a g e

affect the cash balance account of the sme. When cash transactions are NOT recorded

in balance sheet, the cash/bank account in the balance sheet remains the same. the

inflow and outflow of cash is not recorded. This may give false hope to the CRA

about cash/bank account of the SME

Management Evaluation is critical to rate

-No layer of professional manager

SME is not like large corporates with layer of professional manager in every

department. The main and best person to consult is the entrepreneur of the sme

itself.sme lack in the management part because of the less management employees.

b) Lack of Formal Procedure and Discipline

Most SMEs do not have formal procedure or often these are not documented. 

Furthermore, there is tendency for these procedures to change frequently.  This makes

it difficult for third party and newcomer to understand the existing business practices

and match them with the IT process.

CHAPTER 10

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OBSERVATION / FINDINGS

After working for two months I have observed that in addition to Working Capital

Finance and Term Finance, Bank of Baroda has laid out a comprehensive suit of

products specifically catering to SME Borrowers. Loans and Advances offered by

Bank are as follows

Working capital finance ,term finance , MSME ,Baroda SME loan Pack, Baroda

Vidyasthali Loan, Baroda arogyadham loan, Baroda Laghu udhyami credit card,

Baroda Artisans credit card, Barods weavers credit card,Technology upgradation fund

scheme for textile and jute industries,Crdit linked capital subsidy scheme for SSI

units,Composite loans, Collateral Free Loans Under Guarantee Scheme Of Credit

Guarantee Fund Trust For Micro And Small Enterprises, SME short term loans,SME

medium term loans, Baroda SME gold card, Scheme for financing energy efficiency

projects, Baroda overdraft against land and building,Prime minisiter’s employment

generating programme, Loans Under Interest Subsidy Eligibility Certificate Scheme

of Khadi & Village Industries Commission (KVIC-ISEC), Baroda MSME Capex

Card & Baroda MSME Capex Loan,Small business borrowers

According to the annual report (2013) of bank of baroda the following points

were observed

Total Business (Deposit+Advances) increased to Rs 8,02,069 crore reflecting a

growth of 19.3% (y-o-y)

Credit-Deposit Ratio stood at 82.03% as against 86.86% last year

MSME Credit posted a growth of 30.3% constituting 19.7% of your Bank’s Gross

Domestic Credit in FY13

Capital adequacy ratio (CAR) ae per basel 2 stood at 13.30%

Bank opened five new SME Loan Factories at Indraprastha (New Delhi), Anand,

Bhopal, Junagarh, and Jalandhar – taking the total of SME loan factories to 52 across

India. The ‘loan-factory’ model is a pioneering concept introduced by your Bank to

ensure better quality of credit appraisal, reduced turn-around time and improved

volumes – thereby enabling your Bank to increase its MSME lending without

sacrificing the quality of credit.

Bank has already planned the SME Loan Factories, Specialized SME Branches and

MSME cells at various branches for the fiscal year FY14.

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Bank actively participated in various exhibitions and seminars during FY13 to build

brand image of the Bank in MSME financing.

Bank also celebrated the MSME Festival during Jan-Mar 2013 to encourage staff at

the SME Loan Factories and branches to re-double efforts at canvassing new business

According to the study it was seen as bank of Baroda does internal rating to only

existing customers. More than 20 SME’s are rated and provided credit by bank of

Baroda.

Memorandum of understanding was sign between CRISIL and BOB in 2001.

The ratings is done by BOB itself but the software is provided by CRISIL

According to the study, it was seen that BOB is not biased against any particular

sector. There is no discrimination between sme and other sectors.

The rating symbol of Bank of Baroda is

BOB 1-Highest Safety

BOB 2-High Safety

BOB 3-Adequate Safety

BOB 4-Moderate Safety

BOB 5-Moderate Risk

BOB 6-High Risk

BOB 7-Very High Risk

SME sector is given more important as it is for the growth of small and medium scale

enterprises and for the economy.

Ratings are not a guarantee against loss.

Credit ratings are assigned to companies through Credit rating agency.

The rating given by the agency is very important for:

- Investor

41 | P a g e

- Issuer

- Financial Intermediaries

- Business counter-parties

- Regulators

These days people refer to 3 different credit ratings agencies in order to make correct

decision of investment.

Issuer can Appeal to the credit rating agency if they would not satisfy with the ratings

Converting a Bad Credit Rating into Good Credit Rating

Even if past mistakes have brought your company to the despair and the credit rating

is very poor, you always have the chances to improve. However, to rebuild the credit

rating, your financial management team should have all the relevant in formation with

it. There are several computer software programs available in the market that helps a

lot in this regard. Law also permits to convert the bad credit rating in to good credit

rating and repairing the damage done by poor credit rating. According to latest

regulations, credit bureaus have to wipe out negative remarks from

your organizations' credit report after a certain period of time. You can argue with

them regarding any information that you feel objectionable. They have to delete it if

they cannot verify such information

.

CHAPTER 12

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LIMITATION

In India the growth of credit rating agencies are seen, but at some point of time it may

decline and the credit rating companies may end up shutting down.

Indian markets always welcome the new technology, but when the customers are not

satisfied with the technology, it is ignored. Thus the company end up with loses.

Same is the scene with credit rating agencies because of the following reasons

Credit rating is pure manual process so the manipulation can be done easily

Except financial risk, management risk and other risk can be lowered and the

company can be given high rating.

Even after receiving high rating, the financial institution won’t provide the loan

without their own formalities.

So less preference will be given even if the company is highly credit rated company.

This upset’s the customers as after investing money and getting the high rating, they

are still not able to get the credit facility from the market. Thus the growth of the

credit rating company will decline considerably.

CHAPTER 13

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CONCLUSION

The project undertaken has helped a lot in gaining knowledge of the “Credit rating

services provided by credit rating agencies and why external rating favour large

corporates than sme sector” in Nationalized Bank with special reference to Bank of

Baroda. Credit rating of the Bank which is also known as internal rating has become

very vital in the smooth operation of providing credit to its customer. Credit rating

Policy of the Bank provides the framework to determine (a) whether or not the

company is rated enough in all aspects to provide credit (b) how to rate the company

(c) Do they favour particular sector or not. The Project work has certainly enriched

the knowledge about the effective management of “Credit Rating” and “Credit Rating

Process” in banking sector and other Credit rating agencies.

The credit market turmoil that began in the U.S. in the summer of 2007 has been

amplified in recent months by dramatic slowing of broader economic activity. What

began as a significant, but relatively isolated, deterioration in the performance of sub-

prime housing loans has led to a wave of negative events that have reverberated

across a highly-leveraged, interconnected and, at times, opaque global financial

system. More importantly, a credit crisis has transformed into a much wider and

deeper crisis of confidence in the global markets. Credit rating agencies have an

opportunity to help restore confidence in markets by restoring confidence in our

industry.

Credit Rating Policy” and “SME Sector” is a vast subject and it is very difficult to

cover all the aspects within a short period. However, every effort has been made to

cover most of the important aspects, which have a direct bearing on improving the

financial performance of Banking Industry.

To sum up, it would not be out of way to mention here that Bank of Baroda has given

special inputs on “Credit Rating” and “Credit rating Policy for SME sector”. In

pursuance of the instructions and guidelines issued by the Reserve Bank of India,

Bank of Baroda is granting and expanding credit to all sectors.

The concerted efforts put in by the Management and Staff of Bank of Baroda has

helped the Bank in achieving remarkable progress in almost all the important

parameters.

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SUGGESTION

Suggestion for bank of Baroda is that they should increase the credit facility for sme

sector and provide loans to as many as sme sector as they can. Because of the

following reasons

The Kingfisher Airlines currently has a staggering debt of Rs 7,500 crore. One of its

many lenders is the state-run Bank of Baroda (BOB), whose share of the amount is Rs

550 crore.

When we compare this to the bad loans given by BOB to all the micro, small and

medium enterprises (MSMEs) in the country put together. BOB's gross bad loans to

MSMEs amounted to Rs 1,100 crore, or 3.2 per cent of its total loan of Rs 34,500

crore to the entire sector.

Thus BOB's bad loans with just one big company Kingfisher Airlines, are half its non-

performing assets with thousands of MSMES.

MSMEs are risky but the risk is diversified as you are lending to small businesses in

different sectors.- R.K. Bansal, General Manager, SME and Wealth Management,

BOB

Within the MSME segment, RBI guidelines prescribe 60 per cent of bank loans

should go to micro enterprises.

Top-rated SMEs should get interest concession of up to one per cent

BIBLIOGRAPHY

http://businessworld.in/en/storypage/-/bw/financing-smes-an-industry-perspective/

r391725.37542/page/0#sthash.OOzCdUZ9.dpuf

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http://businessworld.in/en/storypage/-/bw/financing-smes-an-industry-perspective/

r391725.37542/page/0#sthash.OOzCdUZ9.dpuf

http://businessworld.in/en/storypage/-/bw/financing-smes-an-industry-perspective/

r391725.37542/page/0#sthash.OOzCdUZ9.dpuf

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