CRISIL SME Ratings: Facilitating Growth and Access to Finance for MSMEs

Yogesh Dixit Director-SME Ratings, CRISIL

September 1, 2012 Mumbai

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Somasekhar Vemuri Director-Criteria & Product Development, CRISIL

Presentation to ICAI

Western India Regional Council, Mumbai

Key Messages

MSMEs are engines for India’s growth – MSMEs account for

• 95% of enterprises in India • 90% of employment-create one million jobs annually • around 9% of India’s GDP-45% of manufacturing output and 40% of exports

CRISIL has assigned 32,000 ratings to MSMEs; this has provided increased access to funds at competitive rates to enterprises – Credit facilities of CRISIL-rated SMEs grew at 30% compared to sector average of 20%

– Aggregate interest savings of Rs 175 crore for CRISIL-rated entities

– SMEs opting for renewal of ratings have outperformed the sector

Concept of rating gaining ground fast in western India contributing more than 42% to all India ratings assigned – Maharashtra 26.9%

– Gujarat 10.8%

– MP 2.5%

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CRISIL’s Coverage of the SME Sector

3

11.0%

6.0%

4.6%

4.1%

3.0%

2.7%2.6%2.4%

2.1%2.1%

2.1%1.9%

1.8%1.7%1.6%

1.4%1.2%

1.2%1.2%

45.2%

Diversified - Manufacturing Engineering Steel And Steel ProductsAgriculture Products Others - Services Electrical EquipmentPlastic And Plastic Products Construction - Civil Textiles - CottonPharmaceuticals Food And Food Processing Textile ProductsFood And Food Products Auto Ancillaries PackagingAutomobiles - 4 Wheelers Metal and Metal Products Chemicals - SpecialityTextiles - Other Others

26.9%

10.8%

8.6%

8.1%

7.6%

4.7%

4.4%

4.3%

3.9%

3.4%3.4%

2.8%2.5% 2.0%6.3%

Maharashtra Gujarat Tamil Nadu PunjabAndhra Pradesh Karnataka Uttar Pradesh West BengalNew Delhi Haryana Rajasthan OrissaMadhya Pradesh Chattisgarh Others

Industry sectors: Covers more than 150 sectors Geography: Spread across 26 states

Benefits of Ratings to MSMEs

4

SME Ratings and credit flow – The Relationship

CRISIL SME Ratings: Bringing Specific Benefits

6

Enhanced access to funds – Credit facilities of CRISIL-rated SMEs grew at 30% compared to sector average of 20%

A strong feedback and self improvement tool – SMEs continuing with the annual rating exercise after first rating have outperformed

the sector

– These firms delivered sales and profit growth of 31% and 25% as against sector average of 25% and 18% respectively

55% of rated SMEs see significant value in the rating – Better borrowing rates and enhanced access to finance

– Aggregate interest savings of Rs.175 crore for rated entities

Value proposition validated by repeat business without subsidy – Rating renewal rates are 35%

Increased credibility with satke-holders and counter parties

• Ratings position companies as 'trusted' and 'credible’ business entities

– Enhance confidence of potential

customers /suppliers/bankers

– Differentiate MSMEs from peers

– Being used on Websites,

Letterheads, Visiting Cards and

Brochures

– External recognition improves

credibility and helps in marketing

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Rating Certificate

Rating Certificate as shown here is issued to MSMEs

It helps in building credibility instantly with customers and other stake holders

Certificates are generally displayed on walls by enterprises

Comprehensive Rating Report is also shared with customers

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Detailed report

Designed to facilitate appraisal by banks

CONTENTS • NSIC-CRISIL PERFORMANCE AND CREDIT RATING GRID • FACT SHEET • STRENGTH AND RISK FACTORS • MANAGEMENT PROFILE • FUTURE PLANS • OWNERSHIP PATTERN • MANUFACTURING FACILITIES • BUSINESS PROFILE • PRODUCT PROFILE • CAPACITY UTILISATION • SUPPLIER INFORMATION • CUSTOMER INFORMATION • ORDERS IN HAND • MARKETING ARRANGEMENTS • OTHER INFORMATION • BANK AND INSURANCE DETAILS • FINANCIAL PERFORMANCE • PROFIT AND LOSS ACCOUNT • GRAPHS • BALANCE SHEET • KEY RATIOS • SITE VISIT INFORMATION • PROMOTERS’ DETAILS

MoU Banks

Sr. No. Partner Banks with MoU

Interest Rate Concession

1 Allahabad Bank 2 Andhra Bank 3 Bank of Baroda 4 Bank of India 0.25% - 0.50% 5 Bank of Maharashtra 0.50% 6 Canara Bank 0.25% - 1.25% 7 Central Bank of India 0.25% 8 Corporation Bank 0.25% - 0.50% 9 Dena Bank

10 Dhanlaxmi Bank 0.50% 11 Dombivali Nagari Sahakari Bank Ltd. 12 Federal Bank Limited, The 13 HDFC Bank Ltd. 14 ICICI Bank Ltd. 15 Indian Bank 16 Indian Overseas Bank 17 Jammu & Kashmir Bank Ltd. 18 Janseva Sahakari Bank Ltd. 19 Karnataka Bank Limited 0.50% 20 Karnataka State Financial Corp.

Sr. No. Partner Banks with MoU

Interest Rate Concession

21 Kerala Financial Corporation Ltd. 1% 22 The Nainital Bank Ltd. 0.50% 23 NSIC Limited 0.5% - 1% 24 Oriental Bank of Commerce 25 Punjab National Bank 0.25% - 0.50% 26 Religare Finvest Ltd. 0.3% - 1% 27 Saraswat Cooperative Bank Ltd. 28 Standard Chartered Bank 29 State Bank of Bikaner and Jaipur 30 State Bank of Hyderabad 31 State Bank of India Discretionary 32 State Bank of Mysore 33 State Bank of Patiala 34 State Bank of Travancore 35 Syndicate Bank 0.25% - 0.50% 36 Tamilnad Mercantile Bank Ltd 0.50% 37 UCO Bank 0.25% - 1% 38 Union Bank of India 0.25% - 0.50% 39 United Bank of India 0.25% - 0.50% 40 Vijaya Bank 0.50% 41 YES Bank 0.25%-1%

Wide Availability and Door-Step Service

More than 32,000 ratings assigned

Presence in over 180 cities through retainer/associate network

Ratings assigned to SMEs in more than 480 cities and towns

All-India reach for verification and basic information collection

70% of rated SMEs are located in non-metro areas

More than 1,500 seminars and workshops organized in collaboration with banks and industry associations

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CRISIL’s pan-India reach

Mumbai

Pune

Surat

Ahmedabad

Bengaluru

Madurai

Chennai

Hyderabad

Raipur Kolkata

Ranchi Indore

Jaipur

New Delhi Chandigarh

Lucknow

Branch Offices Business Centres Retainers

CRISIL SME Ratings: Key Features

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Definitions: Rating Scale & Default

NSIC-CRISIL Rating Scale for MSMEs

CRISIL SME Ratings indicate level of creditworthiness adjudged in relation to other MSMEs

These are issuer level ratings and not issue-specific ratings

Default, for CRISIL’s MSME ratings, occurs when a borrower becomes a non-performing asset (NPA)

This is a 90+ days past due (dpd) default

Credit risk: framework

Although the credit risk framework is the same as used for large corporates, the tools and methods used to assess SMEs are different

• Separate rating methodology

• Lack of organized data and information on industries

• Difficulty in assessment of competitive dynamics

• Managements are not well-known – hence assessment of track record is critical

• Reported financials are less reliable

• Separate scale is required

• Scale calibration is critical

Financial Risk

Overall credit risk

Management Risk

Business Risk

Project Risk

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CRISIL’s SME Ratings : process and validity

Collect & process information

Request for rating received

Site visit conducted by CRISIL Representative

Preliminary information collected

Document/Information sent for analysts

Step 1: Collect and process preliminary information

Analyse and assign the rating

Documents and additional received after site visit

Information checked by CRISIL analysts

Background research is done Management discussion over a

conference call

Rating Note prepared

Rating is assigned

Step 2: Analyse and assign the rating

Communicate & publish rating

Draft Rating Report prepared and forwarded to customers to

eliminate factual inaccuracies

Step 3: Communication and publication of the rating

Changes, if any, received from the client and made

Final report, rating letter and a rating certificate sent to the client

Rating is published on the website / CRISIL SME Connect with the prior

approval of customers

Rating validity

CRISIL’s ratings for MSMEs are valid for a period of one year from the date that the rating has been assigned, subject to no significant changes/events occur during this period that could materially affect the business and financial parameters of the organization

All valid CRISIL ratings for SMEs can be accessed on www.crisil.com/ratings

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CRISIL’s Insights on MSME Sector

Insightful articles on the MSME Sector by CRISIL

1% cost decline could boost SMEs’ profitability by 12.5%

Every percentage interest hike reduces SME profits 14%: CRISIL

MP presents strong growth opportunities for MSME Sector: CRISIL

Ratings enhance access to funding for SMEs: CRISIL Announces 20,000th SME Rating

SME exporters enjoy higher operating margins than domestic peers

MSMEs combat inflationary pressures with own funds

Most MSMEs rated in eastern India from West Bengal

MSMEs in smaller cities in Maharashtra emerging rapidly

Timely payments by large corporates can boost SME profits by 15 percent

Incremental SME funding: A Rs.500 billion business opportunity for India's banks

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Insightful articles on the MSME Sector by CRISIL

Punjab leads in the number of rated entities in northern India

Karnataka among India's top 3 states in employment generation

SMEconomics May 2011- theme ‘Impact of Inflation’

SMEconomics Sep 2011- theme ‘Exports’

Ratings gain foothold in Agra’s footwear-dominated MSME sector

Rajkot has stronghold over castings sector in Gujarat

MSMEs in Hyderabad Benefiting From Right Medicine

Nagpur: A Significant Contributor to the Engineering Industry in India

Inherent advantages make the NCR an attractive business location

Pune in Top Gear in terms of MSME Ratings in Western India

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MSME Funding – Is it sufficient for future growth?

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Geographical distribution of Incremental Funding Opportunity (IFO)

• A state-wise analysis reveals that SMEs in states such as Gujarat, Delhi, and West Bengal have the highest IFOs. These states have the highest potential for incremental SME funding

IFO IFO Maharashtra 16% New Delhi 19%

Tamil Nadu 4% Haryana 14%

Gujarat 25% West Bengal 19%

Punjab 9% Rajasthan 7%

Andhra Pradesh 10% Urban 17%

Uttar Pradesh 18% Semi-urban & Rural 13%

Karnataka 17% All-India Average 15%

Access to Credit among Indian MSMEs – An Overview

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• Higher rated customers can access funds at lower rates with lower collateral requirements

• Expediting credit delivery by reducing efforts and time on credit appraisal

• Greater credit penetration leading to more growth for SMEs

• CRISIL Rated SMEs have witnessed a high growth rate in bank funding

Outstanding Bank credit to MSME Sector

Outstanding Bank credit to CRISIL rated MSMEs

Interest savings aggregate over Rs.175 crore for rated entities

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

March 2009 March 2010

Rs. c

rore

0

5,000

10,000

15,000

20,000

25,000

March 2009 March 2010

Rs. c

rore

25

Some other interesting findings

• Timely payment by large corporates to

SMEs could improve liquidity materially

and enhance profits by 15%

• SMEs with large corporate customers

carry receivables at 80 days of sales

– 35 per cent have receivables in

excess of 90 days

Receivable levels of SMEs with Corporate Customers

• Strains balance sheets significantly and vitiates financial ratios

• Smaller enterprises with lower turnover have weaker receivables position making them more vulnerable

• Sectors such as power, engineering and agro/specialty chemical sectors have the highest receivables position

Timely payments by large corporates can boost SME profits by 15%

Chart 3 : Receivable levels of SMEs with Corporate Customers

0%

5%

10%

15%

20%

25%

30%

0-30 30-60 60-90 90-120 120-150 150-180 180 & above

Receivable (No. of days)

% o

f SM

Es

Some other interesting findings