Enhancing the credibility of MSMEs – Performance & Credit Rating Scheme

Presentedby

Kaushal SampatChief Operating Officer, Dun & Bradstreet India

Third Tri-nations Summit for Small Business Development 19th Nov, 2008

Agenda

No Topic

1 About D&B

2 Challenges faced by MSMEs and the Role of Information

3 NSIC Rating Scheme and its benefits

4 D&B’s Rating Process and Assessment Methodology

5 Key Rating Insights

3

Fast Facts on Dun & Bradstreet

• World’s leading provider of business information;

• Established in 1841;

• Listed on NYSE;

• Presence in over 200 countries;

• Revenue of USD 1.6 bn and market capitalization of USD 4.5 bn;

• Employs approximately 4,200 people worldwide.

• D&B owns and maintains the world’s largest and most comprehensive commercial database of over 140 million business entities;

• Languages/ Dialects covered: 82;

• Currencies covered: 181;

• Updated 1.5 million times every day.

Our heritage, database and technology makes us the world’s most reliable business information provider.

About Dun & Bradstreet India

About Us Key Partnerships

India’s leading provider of Credit Information, Sales & Marketing solutions & Financial Education.

Commenced operations in 1995;

Offices in Mumbai, New Delhi, Chennai, Bangalore, Hyderabad, Ahmedabad, Kolkata;

Major clients include Banks, Financial Institutions, ECGC, Export Promotion Councils, MNCs, Corporates, Exporters, Importers and SMEs.

Set up India’s first Credit Bureau, Credit Information Bureau (India) Ltd with Trans Union, SBI, and HDFC; and public/private sector banks;

D&B has successfully partnered with NSIC for the Performance and Credit Rating Scheme

Set up India’s first SME Credit Rating Agency, SME Rating Agency of India Ltd with SIDBI, CIBIL and public/private sector banks;

Strong alliance with Export Credit Guarantee Corporation of India (ECGC) giving us access to exporters in India. .

D&B India –Rating Experience

• D&B India has delivered over 175,000 rating assessments (domestic and global) to banks, government institutions, corporates and foreign entities.

• Over 75% of the banking referrals have come from India’s largest public sector banks Source – D&B database

• D&B has carried out risk assessment on over 75,000 Indian entities since its

inception.

•Close to 18,000 ratings assigned on availability of full and latest financials (past 1

year)

Over 85% of the assessments carried out by D&B India are MSMEs

Challenges faced by MSME

Role of NSIC Performance and Credit Rating Scheme in Improving MSME Prospects

NSIC Rating Scheme

National Small Industries Corporation (NSIC) introduced the Performance and Credit Rating Scheme in 2005. Under this scheme, the government thru NSIC subsidized rating fees to the tune of 75%. D&B and other agencies were empanelled under this scheme to rate SSIs. Under the scheme over 12,000 ratings have been completed since inception of which D&B India alone has carried out about 50%. D&B India has consolidated its MSME ratings with that of SMERA, a rating agency jointly promoted by D&B India solely for rating MSMEs. The new rating is called NSIC – D&B – SMERA ratings

Role of Ratings

Benefits of Rating to SMEs

Lower approval timeFaster disbursement of funds based on 3rd part independent ratings.

Greater willingness by banks and financial institutions to lend to better credit profile SME borrowers

Interest rates linked to rating of SMEHigher rated customers can access funds at lower rates.Lower transaction costs

Information asymmetry problems reduced

Credit rating assists in simplifying lending normsIn some cases, collateral requirements may also be relaxed

Credit terms

Fund Access

Speed

Simplified Norms

Perception

Benefits of Rating to Banks

RiskManagement

Speed

Efficiency

Consistency

Increased Credit

Sanctions

Quickly handle obvious approvals/declinesLess data is required to make accurate decisions

Decrease bad debtReduce exposure to High risk accounts

Analysts only focus on difficult accountsIncrease volume of accounts

Ensure equal, objective treatment of each applicantApply consistent, objective decisions across the organization

Target credit-worthy SMEs for future promotionsIncrease approval rates

Rating Scale

High Moderate Low

Highest SE 1A SE 1B SE 1C

High SE 2A SE 2B SE 2C

Moderate SE 3A SE 3B SE 3C

Weak SE 4A SE 4B SE 4C

Poor SE 5A SE 5B SE 5C

Financial Strength

Performance Capability

RATING INDICATORS

12

Rating Fees

(Applicable service tax will be over and above the Rating fees and will be paid by the SSI unit only on the 25% of the fees)

 

Turnover Fees per Evaluation Units Pay 25%

Upto Rs. 50 lacs Rs. 30,000/- Rs. 7,500/-

Rs 50 lacs – Rs 200 lacs Rs. 36,000/- Rs. 9,000/-

Above Rs 200 lacs Rs. 48,000/- Rs. 12,000/-

Rating Request D&B Correspondents SSI

Questionnaire

Documentation, audited results and certified projections

Site Visit Assessment

Report

Public Domain Information

Rating Model

Industry Assessment and Cluster

data

Rating Analyst

Peer Review

Third Party Data – e.g. Litigation

Information

Request for Interview and

site visit

Conducts site visit and

interviews Management

Documents Obtained

External Data

D&B Database

SSI RatingFinal Rating

Rating Process Flow

D&B’s Rating Philosophy

StatisticalModeling

Judgmental Rules

IndustryTrends

HYBRID RATING METHODOLOGY

Financial factorsbased on statisticalmodeling

Financial factorsbased on statisticalmodeling

Qualitative factorsbased on due

diligence and sitevisit

Qualitative factorsbased on due

diligence and sitevisit

Schema of Rating Factors

Rating Factor Schema

Financial Parameters Non-Financial Parameters

Solvency Ratios

Liquidity Ratios

Activity Ratios

Profitability Ratios

Management Quality

Location Advantage

Marketing Network

Legal Issues

Industry and Macro-Economic Assessment

Trend Analysis

An exhaustive list of qualitative and quantitative factors considered for rating.

Each financial parameter is benchmarked within its industry-size peer group

Financial Benchmarking

D&B Industry BenchmarkDatabase

Raw Financial Ratios Relative Factor Score

Indicative Non-Financial Parameters

Employee Count

Marketing Network

ManagementShareholding

Age

Legal

Competitive forces

Industry Trade & Credit Terms

Industry growth

Each non-financial parameter is characterized by objective categories which is scored

Information Challenges & D&B’s Approach to Mitigate the Same

• Unwillingness to sharing information in the absence of Inquirer details.

• Non-existence of National level central repository of information for Proprietorship and Partnership concerns which constitutes approx. 85% to 90% of business universe in India.

• Filing requirements are not mandatory for Proprietorship and Partnership concerns.

• Though mandatory under law, some private limited companies do not file or update relevant information / return with company registry which results into non-availability of the latest information.

• In most cases, reluctance to share financial information, information pertaining to customers, suppliers, etc. though they generally share other operational or non-financial information.

Information Challenges

• Increasing pan-India correspondents to 30 from 18 that existed a year back.

• Implementation of correspondents’ evaluation system – witnessing a marked improvement in Service levels.

• Increasing awareness amongst SMEs on the benefits of figuring in D&B’s global database

• Proactively refreshing data/information pertaining to frequently enquired companies

• Migration of registry from physical to electronic format has resulted in increased efficiencies in the information gathering process.

D&B’s Initiatives

D&B: Global Advantage

EXPORTER / SSI BANK

NSIC - D&B - SMERA PC

RATING SCHEME

FINANCE

D-U-N-S NUMBER

BANKBETTER TERMS

D&B GLOBAL DATABASE

ENHANCED VISIBILITY &

SALES

Some Global companies that depend on D&B for evaluating suppliers

D&B Insights on Rating Assessments Carried Out

Region-wise spread of Rated SSIs

D&B has rated over 5,000 SSI units under the NSIC scheme since inception

State-wise spread of Rated SSIs

SSI clusters in Maharashtra and Tamil Nadu have been very receptive to the NSIC scheme

Third Tri-nations Summit for Small Business Development 19th Nov, 2008

Distribution of Rated SSIs based on Legal Status

The NSIC Scheme appears to be most popular among SSIs that are incorporated as Private Limited Companies

Distribution of Rated SSIs based on Sector / Line of Business –Top 80%

Top 3 Sectors/ Lines of Business of rated entities: Industrial Machinery & Equipment

Fabricated Metal Products

Chemicals & Allied ProductsSectors/ Lines of Business are as per globally accepted Standard Industrial Classification Code

Distribution of Rated SSIs based on Sales Turnover

SSIs with higher sales turnover were early adopters of the NSIC Scheme

The NSIC Scheme is gradually gaining popularity among the other segments Figures as per most recent financial statements provided by SSIs

Distribution of Rated SSIs by Employee Count

Nearly 50% of the Rated SSIs have more than 50 employees

Top 10 Export Destinations for Rated SSIs

Nearly 48% of the Rated SSIs are exporters

Customer Feedback

Customer Feedback

“I would like to take this opportunity to thank NSIC for initiating such a positive and encouraging scheme to every individual SSI unit across India. This scheme has clearly made me realize and analyse my strengths and areas of improvement after being in the business for more than 3 decades.”

Mr. Chinnraj, Director - Madras Hardtools Pvt. Ltd., Chennai

Customer Feedback

“Our experience of the rating process has been excellent and we are quite happy with the smoothness with which the entire procedure was completed by D&B”

Mr. Arun Goela, Dy. Managing Director & CEOSwastik Knits Pvt. Ltd., Noida

Thank You