New Delhi, June 29, 2013: Shri S Muhnot, Chairman and Managing Director of SIDBI, the principal financing institution for the Micro, Small and Medium Enterprises (MSMEs) sector in India, has urged credit rating agencies (CRAs) to develop specific and separate product suites for MSMEs in an attempt to make all MSMEs 'Ratings Ready'. While speaking at the National Conference by ASSOCHAM on Credit Ratings, Shri Muhnot stated that SIDBI is partnering with CRAs to make an independent assessment or grading of a loan proposal such that the banks get an assessed SME proposal helping them to significantly enhance their lending to this sector.
"CRAs have to develop specific yardsticks for MSMEs and move away from the rating modules primarily based on those for large corporates. A lot of developmental effort is called here to 'Make the Market' and 'Cluster Approach' is considered the most promising in this respect. SIDBI is currently working with all the credit rating agencies in this regard through its loan syndication services whereby accredited consultants prepare a project report, which is then assessed by the rating agency. And once the investment grade is received, it is then forwarded to Banks for financing. SIDBI is prepared to work with CRAs in a few clusters to test such a model, which can later be replicated to significantly improve access to finance to the MSMEs. SMERA, a SIDBI promoted rating agency is doing a lot of this work in the MSME space and we propose to make a beginning on the cluster approach also with them," said Shri Muhnot.
Since the MSME sector needs both debt and equity to grow, CRAs can diversify into assessment and due diligence of proposals for venture capital, subordinate debt and other risk capital proposals. The Govt. has recently created a Rs 5,000 crore India Opportunities Venture Fund ("IOVF") with SIDBI for the purpose of such assessment and due diligence will help SIDBI while enhancing business opportunity for the CRAs.
A large opportunity awaits CRAs in the form of the large and fast growing MSME sector. The sector comprises more than 35 million units providing employment to more than 75 million people, contributing 40% to Indian exports and 45% to India manufacturing sector. The sector has grown at 11.5% p.a. over the last 5 years, which is a far higher than the GDP or the IIP growth rates, added Shri Muhnot.
The sector is now poised to grow faster due to these important initiatives of the government:
CRAs are active in this sector especially after the support from NSIC for 75% subsidy on rating cost came up. This rating has primarily helped companies obtain interest rte reduction on existing loan and a need to aggressively pursue access to institutional credit for MSME sector is felt.
"In the global economic scenario, the role of CRAs is significant for evaluating and monitoring risk both at investor and systemic level. Financial market development over the last few decades is unthinkable without CRAs. Availability of clear, unbiased, independent, credit opinion has given the necessary fillip for investors to determine the risk return trade-off and take informed investment decisions. This has enabled sustainable growth, both in global as well as domestic financial markets," summed up Shri Muhnot.
The role of CRAs continues to evolve in the post crisis era. Refinements in CRA processes and methodologies are becoming the order of the day. Matters relating to independent and objective reporting, ability to keep non-public information confidential and other such issues have become significant in the global economic arena. Regulators worldwide are evolving policy prescriptions to resolve contentious issues such as conflict of interest, transparency, disclosure, information asymmetry and timely reporting of stress. Although, endeavours to strengthen markets and investment have shown results; more needs to be done to develop India's financial markets. For instance, the bond markets need to be deepened and institutional credit flow to MSMEs has to increase.
Nevertheless it is well recognised that CRAs are integral to developing the financial markets. As the markets have evolved so has the role of CRAs. In the Indian context, from rating of debt instruments; the CRA product suite has expanded to cover bank loans, grading MSMEs and grading equity market instruments such as IPOs. Rating agencies are here to stay and would continue to play an important role in our economic activity in allocating scarce capital for various business requirements in the country.
Small Industries Development Bank of India (SIDBI), set up on April 2, 1990 under an Act of Indian Parliament, is the Principal Financial Institution for the Promotion, Financing and Development of the Micro, Small and Medium Enterprise (MSME) sector and for Co-ordination of the functions of the institutions engaged in similar activities. SIDBI has been instrumental in taking up various policy initiatives for the MSME sector.
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