CRISIL SME Tracker: MSMEs offer working capital opportunity for lenders

Healthy orders from original equipment manufacturers (OEMs) are increasing the working capital requirement of micro, small and medium enterprises (MSMEs) in the auto component sector, an analysis of over 200 MSMEs rated by CRISIL shows.

“That’s a great opportunity for banks re-entering MSME lending after a two-year hiatus,” says T Raj Sekhar, Director, SME Ratings, CRISIL. “Many MSMEs in this sector cater to top-rated OEMs and Tier-I/Tier-II suppliers, which should comfort banks.”

OEMs, which account for over 65 per cent of the auto component sector demand, are clocking growth across vehicle segments (see chart). CRISIL’s interactions with MSMEs show working capital worries building because of limited avenues to raise finance at reasonable rates.

Their working capital cycle will remain stretched, with average receivables and inventory at over 90 days and 60 days, respectively, against the preferred 45 days each. Inability to realise payments on time from customers, high inventories because of diversified customer and product base, higher commodity prices, and GST issues are stretching the cycle.

Lenders can choose the right borrowers through an objective granular assessment of risk. CRISIL’s SME Ratings is a robust tool to measure performance and can help assess financial, business and management risk metrics. Lenders can use these to make informed credit decisions. Ratings can also work as a yardstick that allow MSMEs to benchmark their performance versus peers and use it as a self-improvement tool.