Rating of SMEs has worked wonders in getting bank loans and there are empirical evidence to suggest ratings have changed thousands of SMEs into vibrant enterprises with commercial banks coming forward to provide them loans hand-hold them during difficulties. Rating agency ONICRA Executive Director Varun Mirchandani shares his thoughts on the way forward to make millions of such SMEs in the country a thriving business.
Q: How do you see the SME Credit rating business?
A: Rating should be looked as a tool of corporate governance. It should be looked as a service that is going to increase the businesses for SMEs. Over last six to seven years, more than 100 thousand SMEs have been rated and over 50 thousand crore has been sanctioned to these MSMEs. Credit flows have increased and created more transparency for banks.
We believe NPAs should come down with more rating culture to be created. So may be over the next three to five years you’ll see more than two to three million MSMEs to be rated and creating a financial inclusion model is where we see a credit uptake.
Q: Government plans on making rating mandatory for SMEs to get them better funding. When do you think is that going to happen?
A: I would look at it a little different than mandatory. I believe it’s important to build an ecosystem around an MSME. End of the day, it should benefit the society as a whole in terms of either financial inclusion, or creating employment or in terms of raising the bar for SME. If that is required I think other steps should be taken to build an ecosystem around an SME.
The talks have been happening but I think it’s still at early stages and I would leave that to the other people to take that decision in terms of what the next steps would happen.
If you see other ratings which are Basel compliant or if you see corporate in boundaries, these are nearly compliant to get themselves rated in order to raise money. So over a period of time you may see a lot of MSMEs coming into this flow to get external capital at a cheaper interest rate if they need ratings to get forward.
Q: It seems ONICRA’s ratings drive in a far flung destination like North-East India was a good success; and helped the SMEs there to get better access to loan. Can you throw some light on this?
A: It’s all about the reach of the SMEs. As I’ve told you earlier, the ecosystem is very important and that’s what we did in North-East.
We have a MoU with Assam Gramin Bank where we have rated over 3,000 MSMEs in last 18-24 months and I think all SMEs are very good. It’s all about getting them an opportunity bridging that gap and bring-in the financial inclusion for them.
I feel that we want to go to more tier-2 and tier-3 cities but we require the support of the government to help us to bridge this gap and look at the schemes from a five or ten years perspective and maybe put in a strategy to get down to 5 million SMEs and this is where the vision should be with the government and that is where we’re working in tandem with them.
Q: I understand that rating fee is quite small. But the benefits are immense. Yet why is it being resisted by SMEs? How could this mind-set change?
A: I think they have to see the larger benefit and they have to see the larger role that the MSME Ministry and the SME will physically play. For a country to grow MSME play a very large role.
One rating leads to around 11 jobs. If we rate three to four million MSMEs we can create more than 30 to 40 million jobs. This is a sun-rise industry and we should take it as the same over the next three to five years.
If India needs to grow at 7 to 9 per cent over the next few years, I think MSME is going to be the most important sector to lead and that’s where all of us should collectively push.
Q: Cost of funding has always been an issue for MSMEs. They prefer informal funding over banks. There’s the channel of Stock Exchange (BSE & NSE) which has yet not become popular despite the fact that cost of funds are cheaper. How do you think this can be promoted?
A: Rating is going to create that transparency. Ideas of you to make investments are only going to happen when things are important, available, corporate governance and these are all aspects of raising capital. You give it three to five years, a lot of transparency is likely to come in.
I’ve seen the opposite happening. A lot of companies that were rated got funds cheaper.
A lot of MoUs that we have with large banks, if a good SME is coming forward, they’re actually giving them 0.5 to 1 per cent cheaper interest rate. I want to push this strategy so therefore the cost of borrowing becomes better for these MSMEs and therefore they can add that extra value if they get rated.
Q: What do you think Budget should do to promote SMEs in the country?
A: Government has fantastic schemes. They’re doing fantastically well on the ground but today we need to have a convergent story in this regard. A lot of schemes can be converged into one.
If ratings have been given, can MUDRA be linked, can it be given at a percentage cheaper to the SMEs. Maybe if there’s a technology scheme given to the MSME sector, it can be linked or if it’s raw material then assistance schemes can be given.
The time has come to converge these schemes together and bridge one to upgrade and take MSMEs to next level.
Q: Do you think schemes like Credit Guarantee Scheme (CGS) are working?
A: The idea should be that money should reach the last mile. This is where the government is working along with a lot of rating agencies and how do we build more and more reach, so if you’ve got down ratings towards North-East now and in South.
Now we should look at rating may be thousands of MSMEs on a monthly basis rather than hundreds and that will help us create even more credit flows and help credit uptakes to happen.
Q: According to your data some of the states, basically the smaller ones, are picking up on the ratings. But larger states like Mahrashtra with large number of SMEs are not picking up. What could be the reason?
A: Most of the growth is coming in tier-2 and 3 cities, the way we see it at the moment. If you look at the market size, when we’re talking about 30 million MSMEs, we’re still only scratching the surface of maybe less than one per cent of the total market to be rated.
We have a long way, along with a lot of other rating agencies, and it’s a collective effort which we all need to make along with the government to propagate their scheme maybe even to get down to million or two million in the next 2 to 3 years.
That will create a rating culture, so that is where we want to move forward towards.
Q: Is UAM working and beneficial in ensuring more SMEs get into business?
A: Absolutely, and that is where the mind-set should be. We’ve done the dirty work of taking it to this level and over the next 3 to 5 years you’ll see a huge spurt in the rating industry.
If India has to grow we need to have our own strong rating fundamentals and especially at the bottom of the pyramid which is not there at the area at the moment.
