<b>CRISIL SME Tracker:</B> Diversification makes MSMEs more attractive for lenders

Diversification of business model — by geographical reach, product range, and customer base — carries a lot of weight in credit risk assessments. So a well-diversified MSME will have a credit-quality edge over peers with concentrated businesses. CRISIL’s analysis of the financials of over 1,000 MSMEs for fiscal 2016 reveals that 51 per cent of the well-diversified ones have above-average credit ratings. 

Such MSMEs are more attractive to lenders, having almost twice the leverage over their peers. While higher leverage means more borrowings and interest cost, MSMEs with diversification on the above-stated three parameters still have similar profit margins compared to their peers who harbour concentration risks. MSMEs with well-diversified risks record compound annual growth rate of 18 per cent, compared with 15 per cent for their peers with concentration.

Says Manish Jaiswal, Business Head - SME Ratings, CRISIL: “This is a good time for MSMEs to diversify and gain scale without compromising on profitability. They can benefit from the ‘Make in India’ initiative and the upcoming Goods and Services Tax (GST) regime. Further, the focus on digital transactions, especially after demonetisation, and increasing e-commerce will open up significant opportunities, breaking inter-state trade barriers. MSMEs with diversified operations will be in a better position to avail of non-collateral-based short-term working capital facilities, and can also leverage the Reserve Bank of India’s Trade Receivables Discounting System.”