Frequently Asked Questions: MSE Rating

The Government of India has enacted the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 in terms of which the definition of micro, small and medium enterprises is as under:

Manufacturing Sector
(Enterprises engaged in the manufacture or production, processing or preservation of goods)

Services Sector
(Enterprises engaged in providing or rendering of services)

Investment in plant and machinery

- Micro Enterprise - Does not exceed Rs.25 lakh

- Small Enterprise - Is more than Rs.25 lakh but does not exceed Rs.5 crore

- Medium Enterprise - Is more than Rs.5 crore but does not exceed Rs.10 crore

Investment in equipment

- Micro Enterprise - Does not exceed Rs.10 lakh

- Small Enterprise - Is more than Rs.10 lakh but does not exceed Rs.2 crore

- Medium Enterprise - Is more than Rs.2 crore but does not exceed Rs.5 crore

 

Any Micro and Small Enterprise can avail of the MSE Ratings, provided:

  • It has an Udyog Aadhaar Number
  • It has at least one year's financial statements

 

 

MSE Rating

Bank Loan Rating

Assigned to MSE Unit or Enterprise - hence this is an Enterprise rating

Assigned to a specific bank loan or working capital facility

Regulated by the Ministry of MSME through The National Small Industries Corporation Limited (NSIC)

Regulated by the Reserve Bank of India (RBI)

In the first year of rating, a subsidy support of up to 75% of the rating fee is available

No subsidy is available for rating the bank loan facilities

An 8-point Rating scale that is unique to the MSE sector

A 20-point Rating scale that is similar to the one used for bond market instruments

One-time activity; Rating is valid for one year.  No surveillance process

Involves surveillance throughout the life of the rated facility

 

A SMERA rating enables the MSE unit to have deeper understanding of the strengths, weaknesses and risk factors of its business. As part of the rating process, the MSE is benchmarked vis-a-vis other MSEs of the country, providing the MSE with inputs on areas of improvement. Thus, the rating exercise acts as a self-improvement tool.

A rating agency has no interest beyond the rating fee that it charges for its rating service. To keep the rating opinion independent and unbiased, the rating fee is decided before the rating exercise commences and is paid in full (limited to 25% of the applicable rating fee wherever subsidy is available) by the enterprise in advance. The rating agency does not get involved in any advisory role or loan syndication with any lender or investor. Employees of a rating agency are prohibited from investing or trading in instruments issued by the entities rated by that agency. The rating is not assigned by an individual, but by a Rating Committee. Thus, the outcome of the exercise does not rest with any one individual.

MSEs that have taken cognizance of the areas of improvement highlighted in the Rating Report and acted upon the same, have seen tangible benefits. By working on the areas of improvement, these entities have benefitted. Few examples include:

  • A manufacturing enterprise from Ahmedabad, that caters to Chemical, Refinery, Pharmaceutical and Food Industry, demonstrated improvement in its capital structure and working capital management after taking cognizance of the areas of improvements mentioned in the SMERA Rating Report. The company was in operations for nine years and operated on low capital base. The company ploughed back profits into the business and improved its capital structure. Further, the company took note of the low current ratio and started improving its working capital management. The company reduced the working capital exposure and attained better working capital cycle. This resulted in improvement in current ratio to 1.99 times (FY2012-13) from 1.26 times (FY2004-05). The rating of the enterprise improved to 'Highest' from 'Above Average' category. This enabled the enterprise to negotiate a lower interest rate with its bank.
  • A Coimbatore based enterprise which is into construction of industrial buildings, residential apartments and other civil works got an interest rate concession of 0.25% from its banker. In addition, having a SMERA Rating helped the client in getting adequate and timely credit.
  • A technology firm in Hyderabad, got a term loan and working capital facility of Rs.58, 00,000 (Rupees Fifty Eight Lakh only) from a PSU bank after submitting the SMERA Rating Report.
  • A manufacturing company from Faridabad, Haryana which is into manufacturing of steel and special alloy products had limited product range and operational capacities. The company catered only to domestic sales and hence was unable to meet the diversified needs of its customers. The concerns in the rating report were taken into consideration by the company and they scaled up its business and expanded the business volume to more than Rs.77 crore. This was a result of continuous addition to the production line, entering the overseas market and also catering to its domestic customers.

 

The step of undergoing a rating exercise, in itself, is a positive one for any MSE. It demonstrates openness of the promoter / management to an independent assessment and feedback. SMERA believes that, the following measures will help a rated unit derive maximum benefits:

  • Share and discuss the Rating Report with key personnel within the organisation. This will help the key employees understand the unit's strengths and areas for improvement
  • Display the Rating Certificate in a high footfall area (usually the reception/ entrance) of the office that can be viewed by employees, bankers, suppliers, customers and other visitors
  • Share the Rating with
    • Bankers and potential lenders: This will help understand and arrive at a fair pricing of loans and bank facilities. It may also help in expediting the unit's loan proposals with lenders
    • Existing and prospective buyers: The rating includes a comment on the financial strength and operating performance. This provides comfort to buyers on the execution ability of the rated unit.
  • Work on the areas of improvement: MSEs that are truly enterprising and have growth aspirations can rely on the Rating Report and work on the areas of improvement for sustainable, long term benefits.

 

While every enterprise is unique in its own way, some of the commonly found good practices amongst higher rated MSEs include:

  • Making debt repayment and paying statutory dues on time - A healthy track record of timely payment of debt and other statutory dues indicates financial discipline and overall compliance respectively.
  • Maintaining high standards of disclosures and good quality book-keeping - The transparency and disclosure-levels adopted by an MSE demonstrates good governance. In addition, maintaining good book-keeping standards is indicative of the accounting quality.
  • Avoiding excessive debt - An MSE should refrain from borrowing unnecessarily. Instead, managing the existing credit lines responsibly and judiciously is viewed positively in a rating exercise.

 

Any enterprise needs to objectively and independently validate the gains and improvements achieved in its business over a period of time. An annual review of the rating will help MSEs to update the rating report with their current business and financial performance. This will be required by all counterparties to continue to extend the benefits.

Ministry of MSME, through NSIC, has designed and developed a databank for MSMEs (www.msmedatabank.in). The entry of records in this database is validated collectively through Aadhar Number, Udyog Aadhaar Number and PAN. Only authorized personnel of institutions that are approved by or empanelled with NSIC can upload data and information pertaining to MSMEs. After the completion of the rating exercise, SMERA uploads the information about the MSMEs on this portal. Further, the data so uploaded can be accessed only by officials of the Ministry of MSME and NSIC. This is a one of its kind database that the Government of India is building that will provide authentic data and information on MSMEs to policy-makers. Over a period of time, the data will provide valuable insights on MSMEs and their challenges to policy-makers.

The D-U-N-S® Number helps one make informed decision. An MSE can nurture its business reputation and improve profitability through D-U-N-S® Number in the following ways:

  • Enhances the legitimacy of the MSE's business with potential customers and suppliers
  • May position the MSE to negotiate better terms from suppliers or financial institutions because the MSE's credit profile contains more and better information
  • Presents a more robust profile to potential partners when the MSE is moving into new ventures or markets

 

The turnaround time for a rating exercise is around 8 to 10 days after the site inspection and receipt of all documents.

MSE Rating is valid for one year.

Yes, all accepted ratings will be displayed on SMERA's website and/or other publications. Unaccepted ratings are not published by SMERA.

No, SMERA MSE Ratings will not replace the internal ratings of the lending institution. However, SMERA MSE Ratings supplement the internal ratings.

The MSE unit pays only 25% of the rating fee to SMERA. The remaining 75% of the rating fee is collected by SMERA directly from NSIC once the rating exercise is complete.

As per current guidelines, the NSIC subsidy on rating fees can be availed only in the first year of the rating of the MSE unit.

SMERA does not assist or arrange any banking facility with banks or financial institutions. SMERA's role is limited to providing an independent, unbiased rating opinion about the rated enterprise.

No. MSE Rating does not automatically qualify the rated unit for other schemes (for e.g.: Financing for Procurement of Raw Material, Single point Registration for Government Purchase, and so on) offered by NSIC. NSIC runs several schemes for enhancing the competitiveness of the MSEs. These schemes are run independent of each other and the MSEs desirous of availing benefits of various schemes have to independently apply to NSIC for the same.

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