An Investigation into THE BUSINESS OF RATING
BRIEF: This is an attempt to assess the business of external rating of MSME in particular of accounts with exposure of Rs 500 lacs or above. Internal rating done by a financing bank/institution cannot be called ‘rating’ as the result of such rating is only to assess the borrower client and such rating is not placed in public domain. Thus internal rating done by financer of their borrower /would be borrower is nothing but part of credit assessment and the pricing of such credit if extended.
Intention is to examine the concept of rating, history of rating i.e. how it emerged, who are or could be potential users of such ratings, what are the economic advantages of such rating and last but not the least are there any adverse effects on MSME, its growth and MSME employment potentials and on the NATIONAL ECONOMY.
My fervent and humble submission to the reader is: a) kindly be free from biases and prejudices of past and big names, b) examine the contents of this submission with open mind, c) I welcome comments and d) make this a subject of national debate.
- PERCEPTION & PRACTICE
My investigation commences with two questions i.e. 1. What rating is and 2. What is happening to MSME in the name of such rating?
I ventured to focus on the subject ‘rating’. What the rating is? And I came across the words, “A rating scale is an aid to disciplined dialogue. It is precisely defined format that focuses the conversation between the respondent and the questionnaire on the relevant areas. All respondents are invited to communicate in the shared language of the specified option choices.”
Epistemology of rating shall focus on its essential ingredients. Let us not jump to conclusions and examine the matter with patience, restraint and caution. We find minimum the two essential ingredients/attributes.
- It is a scale.
- This scale is just an aid to disciplined dialogue.
Many words such as ‘disciplined dialogue’ have meaning only with reference to suitable context. Here the context is that of a ‘scale’. To elaborate let us say that the first is ‘A’; which is ‘scale’. Theory of knowledge further says that there is ‘B’; which is ‘disciplined dialogue’. And logical inference is that ‘A’ precedes ‘B’. Therefore for activity ‘B’ to happen the ‘A’ is essential. Still further if activity ‘B’ has to have any logical meaning or impact ‘A’ should be well defined, should be common for all, should be transparent, should have universal applicability, should be easy to understand and should be shared by rating agency in advance.
However my investigation of the field revel vital variances from the above perception.
- In the field are CRISIL,ICRA, CARE,ONICRA,FITCH(India Ratings & Research). What is their rating ‘scale’ is not known. It is opaque.
- Inter se these rating agencies the divergence of their rating ‘scale’, being opaque is not known.
- MSME therefore is in total dark in respect of the parameters on which it is going to be rated and therefore cannot exercise its logical choice of an agency of the five above.
- Definition, the theory and/or logic says that such scale is or has to be a ‘
- Do each of them CRISIL
I asked many of the MSMEs being rated by these agencies a question i.e. have you been provided with a ‘scale’ on which you are to be rated? The answer was a universal negation. Therefore this scale which is considered to be an aid for activity ‘B’ i.e. disciplined dialogue to follow is nothing but hollow. Thus since ‘A’ is not ‘B’ which has to follow ‘A’ cannot be; essence of recommended hierarchy is missing.
Let us come to the next attribute i.e. ‘conversation between the respondent’. And I do quote from a letter written by CEO of an MSME to the rating agency. It says, “The Company is dealing with two financers A and B. Of the two only one that is A has been contacted and the outcome of that is recorded as ‘Satisfactory’. The other has not been contacted. Of the three Employees, Suppliers and the Customers only one i.e. one Employee is put on the feedback radar and the observation there is ‘cooperative and good’. The other essential segments have not been touched even.” When enquired from other MSMEs they too confirmed that the rating agency is just talking to us and they complete the exercise without even touching any external segment. It is just to highlight how the ‘conversation between the respondent’ is going on.
The next process envisages ‘the questionnaire on the relevant areas’. But enquiries revel that none of the MSME has been forwarded with any such questioner.
Last but not the list is the fact that there is no communication ‘in the shared language of the specified option choices’.
Thus there is missing hierarchy in the entire process: And this missing hierarchy has its own impact and meanings.
….. S P Gupta
…. To continue
Author: Shri Prakash Gupta is a Consultant, MSME Credit