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MSMEs feel there is no “tangible benefit” of going through rating exercise, it is a sunk cost: PwC Survey

Updated: Mar 22, 2017 07:04:29am
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MSMEs feel there is no “tangible benefit” of going through rating exercise, it is a sunk cost: PwC Survey

Meerut, Mar 22 (KNN) More than 70 per cent of the MSMEs, according to a survey, feel there is no “tangible benefit” of going through a rating exercise and it is a sunk cost.

A workshop was conducted in Meerut on March 1, 2017  with joint efforts from stakeholders involving IFC, PwC, FISME and MIDFO, targeting the MSMEs in the region.

The key objectives of the workshop was to  spread awareness amongst MSMEs about credit scoring, its relevance and how it could be extracted and used by these enterprises to know their financial standing. In addition, the basic confusion between a credit scoring and credit rating was also addressed.

The workshop also aimed to make the MSMEs understand how the availability of alternate data points around trade credit could potentially increase their accessibility to finance.

The workshop was followed by the visits made by the team from PwC to 14 MSMEs on an individual basis.

One of the key observations that the PwC team made was that the MSME feel there is  a lack of benefit from credit rating exercise  as almost 10 out of 14 SMEs have gone through the external credit rating exercise to access bank loans, however none of them were offered lesser interest rates compared to normal market rates.

Further, they have to also go through an internal bank rating process to be eligible to avail bank loans.

Since most of the bank loans required MSMEs to obtain an external credit rating, majority of the MSMEs raised the issue on the value addition being achieved through the external credit rating. Majority of these enterprises were not able to avail the benefits of a good credit rating in terms of a lesser rate of interest by banks on the loans provided, as most of these bank were using their internal credit rating assessments for deciding the rate of interest.

As a considerable portion of the MSME funding was done through SIDBI, it required the MSMEs to get their credit rating assessment done through SMERA. Whereas most of the other banks/financial institutions prefer MSMEs getting their credit rating done through other credit rating agencies like CRISIL, ICRA, and CARE etc.

“Hence, they feel there is no tangible benefit of going through a rating exercise and that it is sunk cost. Further, they also feel the ratings are subjective and are not based on facts or benchmarking of the similar industry,” according to the finding.

Although the access to finance over the years has improved for the MSMEs, there is a lot of room for improvement especially for financing of micro and small enterprises, who at times lack the collateral requirements for the bank loans. Most of the collateral free loans require the personal guarantee from the proprietors, promoters etc. for the disbursal of loans, which becomes a challenge for some of the startup MSMEs as the owners/promoters do not have adequate personal assets to back it up, the survey noted.

Further, it was also observed that MSMEs feel there is lack of trade credit policy.

“All 14 MSMEs are facing challenges in recovering their receivables on the agreed timeline and about 12 of 14 do not charge any late payment interest in the fear of losing their customers,” the survey pointed.

In majority of the cases MSMEs experience a late payment from the buyer’s or end clients. But more than 85% of the MSMEs met do not charge any late payment interest for the fear of losing out their customers. There was mention of the need for better and stricter govt. policies to be implemented around the late payments and defaults from the customers.

The PwC Survey also observed that there is very less awareness, especially amongst the MSMEs as well as municipal bodies operating in the tier 2/3 cities of the country in relation to the different subsidy schemes being provided by the govt. for this sector.

Another key objective of the survey was updating the MSMEs about the new platforms coming up (TReDS). Making them aware of the usage of TReDS and how this platform could be beneficial for them in obtaining faster working capital financing without the recourse.

There were some concerns raised around the implementation of TReDS. For majority of the MSMEs the value of invoices is less, this would add on to a lot of volume in terms of the invoices being uploaded and managed on TReDS.

As each of these unpaid invoices uploaded on TReDS might have a different bank bidding against it, hence it would become difficult for these MSMEs to keep a track of all the uploaded invoices.

What methods would be used by TReDS in situations where fake invoices are being created and uploaded over the platform, was another concern raised by the MSMEs. (KNN Bureau)

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