ICRA Limited

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ASSOCHAM MSME Innovation Summit

• Presentation by
• ICRA Limited
• (An Associate of Moodys Investors Service)

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About ICRA

• An Associate of Moodys 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

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
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MSME Sector in India

• Micro Small and Medium Enterprise Development
  Act, 2006 passed
• Classification of industries

As 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?

• Lending Challenges

• 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

• 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

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 models 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
  Moodys 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

• Rating Scale Parameters
• Financial Strength
• Performance Capability

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ICRA SME Rating Scale

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

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• Thank you
• Contact Ankush Sharma
• ICRA Online Limited
• 011-23357490-50, 9999970456
• asharma_at_icraonline.com
• dmalhotra_at_icraonline.com

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