Thousands of businesses in India are finding it easier to take out a loan and negotiate with banks for lower interest rate terms, thanks to an Indian government scheme that subsidises 75% of the cost of a credit rating, up to Rs40 000 (R6 500).
The scheme is something the Department of Economic Affairs would do well to study as it looks at how to boost small business financing. The Minister of Economic Development Ebrahim Patel announced in his budget vote speech last month, that the department would finalise a review of small business funding by November.
A credit rating provides a business owner, their bank and even their suppliers, with an independent, trusted third party opinion on the capabilities and credit-worthiness of a business.
The scheme, which was launched by the Indian government in 2005, was drawn up in consultation with the Indian Banks’Association and rating agencies such as ICRA, Crisil, Care and Fitch.
The National Small Industries Corporation (NSIC) which implements the scheme says 67% of business owners that have accessed the scheme were able to take out more credit from their bank after informing their banker about their rating status
Almost a third of business owners that accessed the scheme reported that a rating helped them get increased recognition from their buyers and customers, while 17% revealed that rating helped them in negotiating lower interest rates when borrowing from banks.
NSIC Chairman and Managing Director Dr HP Kumar said banks were granting concessional interest rates of between 0.5% and 2% to those business owners who scored good credit ratings.
Gaurang Dixit, the NSIC’s general manager of finance, said ordinarily a rating could come to between $900 and $1 200, but that through the scheme it only cost a business owner about $300.
Officials from a rating agency visit a business owner’s business place and look at the business’s audited reports for the last three years.
They then compile a report looking at strengths and weaknesses of the organisation’s management and infrastructure capabilities, while providing feedback on how a business owner can improve their performance.
The whole process takes about a month to conduct and a rating is valid for one year.
After the rating expires, it will be up to the business to cover subsequent ones.
However despite all its benefits, the scheme has not made a huge impact. Only 7 500 business owners benefited from the scheme in 2009/2010, a slight increase over the year before when 5 000 accessed the scheme according to Dixit.
Anil Bhardwaj, the secretary general of the Federation of Indian Micro and Small and Medium Enterprises (Fisme) said the scheme was often not recognised by banks, because it wasn’t a rating on a firm’s financial stability, but rather on its processes.
Commenting in the Indian small business online publication SME Times in April, Rajesh Dubey, Executive Director, of rating agency ICRA Online Limited, said some business owners were afraid to take advantage of the scheme fearing they may not get a good rating and because their financial statements don’t paint an accurate picture of their business.
Dubey said rating agencies also had a tendency of only rating those entities who have some amount of financial statement on record.
But he said ICRA looked at other factors when compiling a rating, such as the strength of a firm’s management and what the relationships are with its suppliers and the quality of the product they are supplying. It also compares the entity with others in the same sector of a similar size.
This article appeared in Business Day on 20 April 2010.
Stephen Timm is a