Third-party credit rating irks sector

A worried industry body asks the government to include more rating companies in the list of approved ones.

Access to credit for small and medium enterprises (SMEs) might become even more difficult from April this year when, following the recent RBI guidelines on capital adequacy norms, SMEs with a turnover of Rs 5 crore will have to mandatorily undergo third-party rating.

"A poor rating for an SME would mean around 2-4 per cent higher interest rate than the prime lending rate," said Anil Bhardwaj, secretary general, Federation of Indian small and medium enterprises (Fisme).

Fisme in its pre-Budget demand is asking RBI and the ministries concerned to reconsider this provision, which may crowd out smaller units and is acting as yet another barrier in easy credit-accessibility for SMEs.

According to Fisme, the methodologies and fee structure of the seven rating agencies prescribed by RBI should be regulated. These include ICRA Ltd, CRISIL Ltd, Fitch, Standard & Poor's among others.

"Our early feed back from the ground is that none of them have contextualised their rating systems for SMEs. Their rating methodology is largely 'cut & paste' models they employ for large corporations. Moreover, clubbing SMEs as one sector, ignoring its heterogeneity is completely wrong," Bhardwaj added.

In its memorandum, Fisme has urged the RBI to get the risk of different SME segments studied and a weight assigned only after thorough investigation. It is also asking the government to include more rating companies including those promoted by SMEs collectively to reduce cost and increase outreach.

Further, third-party rating might be inimical to almost 90 per cent of the SME sector, which is informal. "In spite of being credit-worthy, they are unable to provide the kind of information required by rating agencies. This leads to poor rating, which increases the cost of funds as banks provide lucrative interest rates only to top-rated companies," Bhardwaj explained.

Moreover, if a small company does not take the third-party credit report, it is automatically assigned the worst rating by the bank and the highest rate of interest is charged, Bhardwaj added.

The cost of rating is another concern for SMEs. Currently, there is no guidance on the fee that agencies are to charge. "They quote on a 'case to case' basis. Fisme has reports where the agencies are charging anywhere between Rs 50,000 and Rs 3 lakh for small-and mid-sized-companies. Moreover, the industry has to seek renewal of rating every year and pay up further," Bhardwaj said.

Though there are certain subsidies on ratings given by the government through National Small Industries Corporation, Fisme feels that though the scheme may be well intentioned, with its current focus, outlay and outcome it will neither achieve its outreach nor have any impact on millions of small industries who are going to be badly hit by the new RBI provisions.

"The subsidy is only for the organised sector which hardly constitutes 10 per cent of the sector overall. Secondly, the subsidy is limited to Rs 40,000 and there is no provision for subsidising the recurring cost of renewal," said Bhardwaj.

In its other demands, Fisme is seeking a slew of initiatives like intensifying competition among banks buttressed by suitable fiscal incentives, effect financial sector reforms to reduce entry barriers and induce better code of conduct for service.

"New financial instruments need to be encouraged for SMEs to reduce their sole reliance on debt finance, particularly, factoring (with/ without recourse) and private equity," Bhardwaj added.

Fisme is also urging the government for an extension of the credit-linked capital subsidy scheme, which expired on March 31 last year.