Credit Rating

1. CREDIT PROFILES
AND RATING
MIGRATION OF
SMES IN THE ASIAN
EMERGING
ECONOMIES
By:
Khusboo Agarwal
958, Semester V
(Under the guidance of Dr.Rituparna Das)

2. THE CONCEPT OF CREDIT PROFILING
 Definition: A document
that contains the complete
listing of all the credit
information.
 Significance: Used by
lenders and other
agencies which offer
credit to determine
someone's
creditworthiness, and they
are also utilized by
prospective landlords and
other people who might
have an interest in
someone's credit history.

3. THE CONSTITUENTS OF CREDIT PROFILE

4. CREDIT RATING MIGRATION/TRANSITION
 Definition: The upgrading or worsening in a
credit's ranking and credit grade over time. It is
the migration of a debt instrument from one
rating to another rating over a period of time.
 Credit Rating Agencies: The International Rating
Agencies such as S&Ps, Moody's, and Fitch assess
the credit quality of all the debt instrument in
their portfolio and assign a rating to the credit
quality. This rating changes as and when new
information is available about the obligor's
financial health.

5. CREDIT RATING PROCESS

6. SLABS OF CREDIT RATING

7. THE WORLD OF SMALL AND MEDIUM
ENTERPRISES

8. Small
Enterprise
Between
25,00,000
(Rupees
Twenty-Five
Lakhs only)
to 5,00,00,000
(Rupees Five
Crores only).
Between 10,
00, 000
(Rupees Ten
Lakhs only)
and
2,00,00,000
(Rupees Two
Crores only).
Medium
Enterprise
Between
5,00,00,000 (R
upees Five
Crores only) to
10,00,00,000
(Rupees Ten
Crores only).
Between
2,00,00,000
(Rupees Two
Crores only)
and Rs. 5,00,
00,000
(Rupees Five
Crores only).
The international
criterion to define
SMEs are the
number of
employees, total
net assets, sales
and investment
level.

9. PROBLEMS FACED BY SMES IN ASIA
 Small and medium sized enterprises (SMEs) are the key to
employment and innovation in Asia, but they are often starved
of credit, information and support services. Over 90 per cent of
companies in Asia are SMEs and they contribute to over 60
per cent of GDP, and more than two-thirds of employment and
most innovations. As Asia seeks to transition to a new era of
growth, correcting these weaknesses will often determine
success or failure.
 SMEs are hindered not just by a lack of financing, but also by
serious non-financial constraints, such as insufficient skills and
technology, high transaction costs, poorly defined property
rights, inadequate market access and poor coordination of
government SME support.
 Asia needs to promote SME development in a more holistic
manner, with closer public-private collaboration to create a
supportive and technology-enabled ecosystem for SMEs to
thrive.

10. CHINA
 SMEs number 42mn accounting for
99.8% of enterprise and 75% urban
employment. Their contribution to
the economy is immense at 60% of
GDP, 68% of export volume and
50% tax income. They also account
for 66% of patent applications and
82% of new products.
 In recent years, in addition to the
effect of the abrupt slowdown in the
winter of 2008-09, businesses have
faced challenges from new labor
regulations and environmental
regulations.
 According to the official estimates,
7.5% of the SMEs have already
gone out of business by end-2008.

11. FINANCING OF SMES IN CHINA
 Scott and Wang (2006) state that there are several sources of finance
available for SMEs in China. However, types of finance that are both
available and obtainable differ for SMEs in different life cycle of the
enterprises. They mentioned the following sources of finance available
for SMEs in China:
 Personal savings: This form of financing is usually preferred if it is
available as it does not require any interest payments in a fixed nature.
Therefore, due to difficulties in finding and obtaining loan at the start-up
stage, most owners of the small enterprises usually invest their own
savings.
 Loan from immediate friends and relatives: This is another source of
finance for SMEs in China as majority SMEs are organized and opened
with the help of this type of financing. Due to strong family culture
inChina, the access to this type of financing is easier than it can be found
in EU or theUS.
 Trade credits: Zhuo (2001) stated that trade credits is one of the
financing sources for SMEs in China as it gives them the privilege of
paying back to their suppliers later. This is also considered to be a good
form of financing methods as small and medium sized enterprises
usually struggle with cash at the early stage of their business operations.
However, getting a trade credit also requires SMEs to provide healthy
and strong cash flow statements, where in many cases it is impossible.

12.  Bank loans: Banks loans are crucial sources if
financing any business in most countries due to the
length and lower interest rates than the equity. However,
obtaining a bank loan is another obstacle in financing
SMEs in China. This is due to the fact that most of the
banks are state-owned commercial banks that hold most
of the deposits and lending power in the country.
Therefore, due to their relatively large and monopoly
position, commercial banks usually prefer to lend money
to large and listed companies as they are less risky than
SMEs in terms defaulting the interest payments.
 Moreover, commercial banks usually offer excessively
large amounts of loan that is much more than the needs
of SMEs, therefore, they are less interested in issuing
loan to SMes due to economies of scale.
 Furthermore, the credit ratings required to obtain a loan
from these banks are really high, and in most cases
SMEs credit ratings do not meet these high ratings
requirements by state-owned banks (Fontes, 2005).

13. CREDIT RATING OF SMES IN CHINA
 Financial Conditions
• Liquidity ratios
– Quick ratio (Percentage)
– Current ratio (Percentage)
• Leverage ratios
– Times-interest-earned (times)
– Total debt to assets (percentage)
– Debt to equity ratio (Percentage)
• Profitability ratios
– profit margin (Percentage)
– ROS, i.e. rate of sales (Percentage)

14. – return on net assets(Percentage)
– ROE, return on equity (Percentage)
• Efficiency ratios
– Inventory turnover (time)
– Receivable turnover (time)
– Assets turnover (time)
 Characteristic and Perspective of the products
• product marketability (Linguistic value)
• product market share (Percentage)
• product perspective (Linguistic value)
 3. Operation Risk and Competitive Strength
• running risk (Linguistic value)
• technologies and R&D ability (Linguistic
value)

15.  5. Conditions of Industry
• Macro-industry policies (Linguistic value)
• industry risk in the next year (Linguistic
value)
• economic condition prediction in the next year
(Linguistic value)
 6. Management Measure

16. INDIA
 Small and medium enterprises
(SMEs) have been the backbone
of the Indian economy. That is
both a good and a bad thing.
 The Good Part: Employing close
to 40% of India's workforce and
contributing 45% to India's
manufacturing output, SMEs
play a critical role in generating
millions of jobs, especially at the
low-skill level. The country's 1.3
million SMEs account for 40% of
India's total exports.

17.  The Bad Part: The bad thing is that SMEs in India,
due to their low scale and poor adoption of
technology, have very poor productivity. Although
they employ 40% of India's workforce, they only
contribute 17% to the Indian GDP.

18. CREDIT RATING AGENCIES
 SMERA Ratings Ltd (SMERA) is a full service credit
rating agency exclusively set up for micro, small and
medium enterprises (MSME) in India. It provides ratings
which enable MSME units to raise bank loans at
competitive rates of interest. However, its registration
with Securities Exchange Board of India SEBI as a
Credit Rating Agency and accreditation by Reserve
Bank of India RBI in September 2012 as an external
credit assessment institution (ECAI) to rate bank loan
ratings under Basel II guidelines has paved way for
SMERA to rate/grade various instruments such as: IPO,
NCDs, Commercial Papers, Bonds, Security Receipts,
Fixed Deposits etc. In addition to this, RBI has told that
Banks may use ratings of bank facilities (Bank Loan
Ratings) from SMERA, to assign risks to loans for the
purpose of computing capital adequacy requirements.[

19.  CRISIL provides the widest range of ratings in India
and has rated and assessed 60,000 MSMEs, which
is by far the highest number anywhere in the world.
Several of India's largest companies use our
customised SME assessment services to evaluate
their vendors, dealers, distributors, and franchisees.

21. Company Name City
Rating
Assigned
Date
Assigned*
Constitution
A K Traders Indore SME 5 30/09/2013 Proprietorship
A N Traders Private Limited New Delhi SME 2 07/04/2014 Private Limited
A T E Enterprises Private
Limited
Mumbai SME 2 06/03/2014 Private Limited
A and A International Trading
Private Limited
Chennai SME 2 26/06/2014 Private Limited
A and W Promoters &
Developers Private Limited
Belgaum SME 5 27/06/2014 Private Limited
A. B. Pal Electricals Private
Limited
New Delhi SME 2 27/01/2014 Private Limited
A. B. Plasto Private Limited New Delhi SME 4 28/07/2014 Private Limited
A. B. Polymer Industries Patna SME 5 30/06/2014 Partnership Firm
A. B. Smelters Private
Limited
Howrah SME 4 11/03/2014 Private Limited
A. D. Wines Una SME 4 22/01/2014 Partnership Firm

22. BENEFITS OF CREDIT RATING
 Concessional funding: A good rating can help you
gain faster and cheaper credit for your venture. The
agencies that provide rating for SMEs—Crisil
Ratings, SME Rating Agency of India (SMERA),
Icra, Credit Analysis & Research (CARE), Onicra,
and Fitch—have tie-ups with several banks to offer
preferential interest rates based on ratings. For
instance, Crisil Ratings has such a working
arrangement with 35 banks and financial
institutions, while SMERA has entered into such
pacts with 29.

23.  According to Crisil Ratings, the interest rate
reduction for its clients ranges from 0.5-1.25% and
around 35% of the enterprises have reported a
reduction in the loan processing time. "In some
cases, banks have approached them with funds,"
says Ramraj Pai, director, Crisil Ratings. SMERA
feedback suggests that enterprises enjoy interest
rate concessions to the extent of 0.25% to 1%. "In
many cases, savings from the reduced borrowing
cost exceeds the rating fee," says Parag Patki,
CEO, SMERA.

24.  "If a firm gets a good rating, he can even approach
other banks to get a better rate bargain than the
one provided by his existing banker," says Munhot.
 Better business opportunities: The independent risk
evaluation of SMEs by an unbiased third party
lends credibility to them and opens doors for them
while dealing with MNCs and corporates. "You can
submit credit rating for tenders and make yourself
more credible to get bigger orders. It also provides
easier access to other sources of finance such as
private equity," says Pai. "Better ratings have
helped the SMEs retain customers and suppliers,
and negotiate better terms with them," says Patki.