• How-to

As an entrepreneur, if there is one thing that is most crucial for you, it is the ability to secure funds. This ability is governed as much by your credit-worthiness as it is by the soundness of your business model. A credit rating is an external evaluation of the borrower’s overall credit history and his/her ability to repay debt. It is a comprehensive assessment by a third party that is arrived at after considering the financial, non-financial and subjective factors of the entity/individual being evaluated.

In India, agencies like CRISIL have been popular in the rating sphere till date, giving corporate entities a chance to get themselves professionally graded and evaluated vis-à-vis industry peers.

Now, there is an independent rating agency dedicated to SMEs in the country. Known as SMERA or SME Rating Agency, it categorizes MSMEs based on size, so as to enable fair evaluation of each MSME among its peers. The four brackets MSMEs are classified into, based on net worth, include A: Rs.20 crore and above; B: Between Rs.5 crore and Rs.20 crore; C: Between Rs.1 crore and Rs.5 crore; and D: less than Rs.1 crore.

SMERA’s composite appraisal indicator grades SMEs on a scale of 1 to 8 (1 for highest and 8 for lowest) while the NSIC-D&B-SMERA rating scale (SMERA has an association with both NSIC and D&B) evaluates SMEs using a matrix of financial strength and performance capability. Here’s how you can approach SMERA and get your venture a standardized, transparent credit rating.

Understand the rating methodology and benefits of getting a rating
SMERA considers both financial and non-financial parameters of the enterprise and evaluates the impact of the macro economic environment on the venture also. Factors like trade policies, government regulations, currency fluctuations, industry volatility and demand fluctuations are all taken into account. SMERA believes that the industry that the firm operates in has a major impact on the volatility of the business and its risk bearing ability. Other factors that SMERA evaluates include market risk, operating efficiency, price advantage, management ability and character, financial risk and transparency, and new project risk. Once an SME goes through this comprehensive assessment process, it gains many advantages. SMERA has entered into MoUs with 29 banks and financial institutions, with 11 banks and lending institutions providing commercial benefits to well-rated SMERA units. Member banks and SMERA have also made an effort to map their respective rating models to make the SMERA certification more acceptable for lending purposes. This rating would also enhance the credibility of SMEs in the market for trading purposes.

Make a rating request and calculate rating fees
All types of MSMEs involved in either trading, manufacturing or service activities are eligible for a SMERA rating. The first step in the rating request is to approach SMERA and get an application form. You can download this form by logging on to www.smera.in or sending an e-mail to info@smera.in.

Alternatively, entrepreneurs can get in touch with any of the SMERA regional offices in Ahmedabad, Delhi, Bengaluru, Hyderabad, Chennai, Kolkata, Coimbatore, Ludhiana or the head office in Mumbai. As far as fees are concerned, eligible SSI (small scale industrial) units can enjoy a rating fee subsidy of up to 75 percent offered under the ‘Performance and Credit Rating Scheme of NSIC’. In order to avail this subsidy, the eligible units should possess a valid MSME Memorandum Number (earlier known as the SSI Registration Certificate). You can get this number by applying to the local DIC (District Industries Center) office. The criterion for this is that your unit’s investment in plant & machinery should not exceed Rs.5 crore in case of manufacturing activity and Rs.2 crore in case of service industry. You should also not have availed of any rating subsidy in the past from NSIC. The rating fee structure (both with and without subsidy) is available on the SMERA website for the easy reference of entrepreneurs.

Submit the relevant documents
The document checklist for MSMEs includes: A) Copy of audited accounts for the last three financial years; B) Copy of insurance policies; C) Sanction letter of all credit facilities being availed; D) Bank statement and EMI payment record of the last one year; E) Banker’s confidential report; F) Partnership Deed & ROF certificate/ Memorandum and Articles of Association; G) Details of shareholding; H) Latest certified net worth statements; I) Write-up about products/ services; J) List of orders in hand; K) production capacity and actual production breakup for last three financial years; L) List of plant and machineries; M) Authority letter; N) Details about the enterprise; and O) New project report.

Co-operate for site visit and management interview
Once the application form, relevant documents and the applicable fees are submitted to SMERA, internal processing starts from SMERA’s side. The next stage involves a site visit by a SMERA representative for physical verification of the unit. The representative will also conduct an interview with the management and key personnel of the enterprise. This interview will help him to better understand your capabilities as a promoter and the overall vision of the unit. A questionnaire dealing with the financial and qualitative factors of the enterprise is also required to be filled in by the SMERA official with inputs from your side.

Receipt of rating certificate and rating report
SMERA will send a draft report that you would need to confirm before the rating is finalized. The rating report is a rationale of the rating assigned; it contains details of the management, analysis of the financials, site visit observations, industry outlook and details of the unit’s compliance to the current statutory framework. The rating certificate, on the other hand, only mentions the rating assigned, the unit’s name and promoter names. A SMERA rating report is valid for one year from the date of issue following which it has to be renewed.

©Entrepreneur March 2011

Tags:
credit rating, rating agency, SMERA