SME Industry Credit Rating  Creating an aligned rating system for SME Banking SME Forum 2008 Ahsan Ali
SMEs – Basic Ingredient The Entreprenuer is the basic building block of any economy
SME’s – Reasons for failure Single biggest reason is attributable to the world of finance
SME’s – Poor Financial Management (Detailed Analysis )  Access to financing is the biggest issue faced by SME’s Bank’s per...
SMEs – The Bank’s Perspective How do you evaluate SME’s?
SMEs – The Need AND
SME – UCR (Key Reasons) No uniformity in the basis of assessment Cost of credit (probability of default) high because of l...
SME – UCR ( Rating Process)
<ul><li>Overall understanding of business process and practices </li></ul><ul><li>Estimate of the sustainability of the bu...
Credit Rating Financial  Analysis Valuation Financials Profile GOAL Risk Assessment Credit Models SME – UCR (Difficulties ...
SME – Credit Rating Agencies <ul><li>Singapore   </li></ul><ul><ul><li>One agency, SME Credit Bureau, a private initiative...
Global / Regional Players to Focus on SME Sector
Case Study - NIB Approach
Thank you
Appendix
SME Contribution to Economy - Summary <ul><ul><li>In summary: </li></ul></ul><ul><ul><li>SMEs create more employment </li>...
Bibliography   <ul><li>Promoting & Supporting SME Development: The case study of Madagascar and Kenya; Paul Malherbe Chief...
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Sme Unified Credit Rating

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A discourse on the need for a Unified Credit Rating for SME\'s as a solution for access to financing

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  • Sme Unified Credit Rating

    1. 1. SME Industry Credit Rating Creating an aligned rating system for SME Banking SME Forum 2008 Ahsan Ali
    2. 2. SMEs – Basic Ingredient The Entreprenuer is the basic building block of any economy
    3. 3. SME’s – Reasons for failure Single biggest reason is attributable to the world of finance
    4. 4. SME’s – Poor Financial Management (Detailed Analysis ) Access to financing is the biggest issue faced by SME’s Bank’s perceived as part of the problem rather than a solution
    5. 5. SMEs – The Bank’s Perspective How do you evaluate SME’s?
    6. 6. SMEs – The Need AND
    7. 7. SME – UCR (Key Reasons) No uniformity in the basis of assessment Cost of credit (probability of default) high because of lack of data High Rating Cost/No access to rating agencies Greater Access to Credit Peer and industry comparison possible Lower Rating Cost Databases on rating transitions and SME performance Linkages of downstream industries with major industries not analysed
    8. 8. SME – UCR ( Rating Process)
    9. 9. <ul><li>Overall understanding of business process and practices </li></ul><ul><li>Estimate of the sustainability of the business </li></ul><ul><li>Key driving factors of the business </li></ul><ul><li>Important customers and suppliers </li></ul><ul><li>Sales and purchases fragmentation </li></ul><ul><li>Order book position </li></ul><ul><li>Strategic strengths and weaknesses </li></ul><ul><li>Diversification Plans </li></ul><ul><li>Projections and synergies </li></ul><ul><li>Independent confirmations from suppliers and customers about the performance and market standing of the subject </li></ul><ul><li>Inherent risk involved in a similar type of business </li></ul><ul><li>Gross Profit and Net Profit Margins </li></ul><ul><li>Trend analysis </li></ul><ul><li>Gearing </li></ul><ul><li>Return on Net worth and Return on Capital Employed </li></ul><ul><li>Contingent Liabilities </li></ul><ul><li>Debt service coverage ratios </li></ul><ul><li>Inter company loans with specific attention on the Companies belonging to same owner but not consolidated with other Companies </li></ul><ul><li>Monthly cash flows </li></ul><ul><li>Other financial factor peculiar to the business of the company </li></ul><ul><li>Constitution and Shareholding pattern of the group companies </li></ul><ul><li>History of the group and its promoter </li></ul><ul><li>Review of other companies and investments held by the promoter </li></ul><ul><li>Financing and Operational ring fencing measures taken by the management </li></ul><ul><li>Professionalism in management </li></ul><ul><li>Succession plans of management including second line of management </li></ul><ul><li>Management philosophy </li></ul><ul><li>Gearing philosophy of management </li></ul><ul><li>Local Shareholders interference in the management of the companies </li></ul><ul><li>Other factors peculiar to the business and management </li></ul>SME – UCR ( Rating Parameters) Business Financial Promoter & Management Criteria Parameters
    10. 10. Credit Rating Financial Analysis Valuation Financials Profile GOAL Risk Assessment Credit Models SME – UCR (Difficulties in developing a UCR)
    11. 11. SME – Credit Rating Agencies <ul><li>Singapore </li></ul><ul><ul><li>One agency, SME Credit Bureau, a private initiative of the Association of SMEs and D&B with the support of government. </li></ul></ul><ul><ul><li>Establishing a resource panel to access credit worthiness of SMEs by adopting standardized Credit Assessment system. </li></ul></ul><ul><ul><li>Strengthen the capabilities for SME Credit evaluation </li></ul></ul><ul><li>Africa </li></ul><ul><ul><li>Development of SMEs in sub-Saharan Africa, World Bank extended a capacity building facility for developing a credit scoring tool in partnership with Tanzania, Uganda and Kenya </li></ul></ul><ul><li>Japan </li></ul><ul><ul><li>Adopted SME Rating Approach. Standard and Poor’s partnered Risk Data Bank of Japan to introduce SME Rating Service. </li></ul></ul><ul><ul><li>Considers qualitative and quantitative factors for assigning a rating </li></ul></ul><ul><li>India </li></ul><ul><ul><li>Established independent external credit rating Agency of India Ltd (Smera) to access credit ratings of SMEs </li></ul></ul><ul><ul><li>Trying to address asymmetry issue prevailing in SME sector </li></ul></ul><ul><ul><li>Provides comprehensive, independent and reliable assessment of the enterprise to financiers. </li></ul></ul>
    12. 12. Global / Regional Players to Focus on SME Sector
    13. 13. Case Study - NIB Approach
    14. 14. Thank you
    15. 15. Appendix
    16. 16. SME Contribution to Economy - Summary <ul><ul><li>In summary: </li></ul></ul><ul><ul><li>SMEs create more employment </li></ul></ul><ul><ul><li>SMEs require a conducive environment, consisting of: </li></ul></ul><ul><ul><ul><ul><li>Drivers </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Infrastructure </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Governance </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Human element </li></ul></ul></ul></ul><ul><ul><ul><ul><li>SMEs need non-Financial assistance </li></ul></ul></ul></ul><ul><ul><li>Investors can therefore use the human element of SMEs to create employment in the economy </li></ul></ul>
    17. 17. Bibliography <ul><li>Promoting & Supporting SME Development: The case study of Madagascar and Kenya; Paul Malherbe Chief Operating Officer: Mentorship and Consulting (Page 9 and Page 11) </li></ul><ul><li>Perspectives on SME Financing Difficulties in China; Mario Fischel, General Manager Jinchang Lai, Head, Financial Sector & Business Environment IFC China Project Development Facility (Page 4 and Page 6). </li></ul><ul><li>SME Financing Landscape in Singapore; Mr Inderjit Singh, Deputy Chairman, ACE and Chairman Finance Action Crucible (Page 2) </li></ul><ul><li>Rating SME transactions - Tycjan Bielecki Assistant Vice President- Analyst Business Development CEE Structured Finance Group – Moody’s Investors Service (Page 3) </li></ul>

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