A primer for getting credit rating by SMEs
Updated: Jul 25, 2013 04:09:47pm
From Gunja
New Delhi, Jul 25 (KNN) A credit rating evaluates the credit worthiness of a borrower, especially an enterprise. It is an evaluation made by a credit rating agency, profiling a company’s ability to borrow and service debt.
It represents the agency's evaluation of qualitative and quantitative information about a company, including non-public information obtained by analysts.
Credit evaluation in the Small and Medium Enterprises (SMEs) needs a specialised approach as it reflects the entity’s level of creditworthiness, adjudged in relation to other SMEs.
“Credit Rating Agencies (CRAs) in India introduced the concept of credit evaluation in the SME sector. Credit evaluation in this sector needs a specialised approach, as the issues and drivers of credit quality are different from those applicable to large companies. This rating assesses the SME’s performance capability and financial strength. SME ratings are firm specific ratings, unlike credit ratings, which are debt-obligation specific. These ratings are not an opinion on the timeliness of debt servicing,” according to an ASSOCHAM and CRISIL Primer.
There is a procedure for the SMEs to apply for rating, it is given as follows step-by-step.
1. The process starts with the request. Then, a team from the rating agency is assigned the responsibility of analysing the company’s credit risk profile. This team collates preliminary information about the company to understand its business, management, and financial risk profiles.
2. Management interactions between the business and rating analysts, enables them to incorporate non-public information into its rating decision.
Discussions are wide-ranging, covering competitive position, strategy, financial policy, historical performance, and near and long-term financial and business prospects.
3. After discussion, rating analysts prepare a report detailing their assessment of business risk, financial risk, and management risk associated with the issuer. The company does not directly participate in this step. The rating committee assigns a rating after thorough discussion on the report prepared by the analysts.
4. The rating decision is communicated to the company. A document supporting the rating is shared with it. This is to assist the company in understanding the key analytical factors that have been assessed for arriving at the rating decision.
CRAs allow the company to decide whether to accept the rating. On acceptance, a letter is sent by the company. On the other hand, those who disagree can appeal again.
5. After acceptance of a rating by the company, it is disseminated to CRA’s subscriber base, and to local and international media.
6. All ratings are under regular surveillance. After a rating has been assigned, CRA continues to monitor the performance of the company and the economic environment in which it operates.
7. Ratings are not a one-time exercise and are under continuous surveillance over the life of the rated facility. The ratings may be withdrawn if the rated facilities are pre-paid by the borrower, with the lender’s consent. For bank loan facilities such as cash credit, which do not have a scheduled repayment date, the rating is placed on notice of withdrawal for 180 days, and subsequently withdrawn.
8. In case the rated firm does not share information with the agency on regular basis or provide access to its management or discuss annual results, that firm is classified as non-cooperative. If it is believed that the subsequent information provided by the rated firm is inadequate to conduct credit assessment, it may suspend the rating and inform the investors of the same.
9. A substantial portion of the information shared by the rated firm is highly sensitive and is kept strictly confidential by the ratings group and not shared with other divisions or group companies of CRAs.
A credit rating compresses an enormous amount of diverse information into a single rating symbol. A simple alphanumeric symbol, such as ‘AAA’ or ‘A2+’, is normally used to convey a credit rating. (KNN)
Feedback: newsdesk@knnindia.co.in
New Delhi, Jul 25 (KNN) A credit rating evaluates the credit worthiness of a borrower, especially an enterprise. It is an evaluation made by a credit rating agency, profiling a company’s ability to borrow and service debt.
It represents the agency's evaluation of qualitative and quantitative information about a company, including non-public information obtained by analysts.
Credit evaluation in the Small and Medium Enterprises (SMEs) needs a specialised approach as it reflects the entity’s level of creditworthiness, adjudged in relation to other SMEs.
“Credit Rating Agencies (CRAs) in India introduced the concept of credit evaluation in the SME sector. Credit evaluation in this sector needs a specialised approach, as the issues and drivers of credit quality are different from those applicable to large companies. This rating assesses the SME’s performance capability and financial strength. SME ratings are firm specific ratings, unlike credit ratings, which are debt-obligation specific. These ratings are not an opinion on the timeliness of debt servicing,” according to an ASSOCHAM and CRISIL Primer.
There is a procedure for the SMEs to apply for rating, it is given as follows step-by-step.
1. The process starts with the request. Then, a team from the rating agency is assigned the responsibility of analysing the company’s credit risk profile. This team collates preliminary information about the company to understand its business, management, and financial risk profiles.
2. Management interactions between the business and rating analysts, enables them to incorporate non-public information into its rating decision.
Discussions are wide-ranging, covering competitive position, strategy, financial policy, historical performance, and near and long-term financial and business prospects.
3. After discussion, rating analysts prepare a report detailing their assessment of business risk, financial risk, and management risk associated with the issuer. The company does not directly participate in this step. The rating committee assigns a rating after thorough discussion on the report prepared by the analysts.
4. The rating decision is communicated to the company. A document supporting the rating is shared with it. This is to assist the company in understanding the key analytical factors that have been assessed for arriving at the rating decision.
CRAs allow the company to decide whether to accept the rating. On acceptance, a letter is sent by the company. On the other hand, those who disagree can appeal again.
5. After acceptance of a rating by the company, it is disseminated to CRA’s subscriber base, and to local and international media.
6. All ratings are under regular surveillance. After a rating has been assigned, CRA continues to monitor the performance of the company and the economic environment in which it operates.
7. Ratings are not a one-time exercise and are under continuous surveillance over the life of the rated facility. The ratings may be withdrawn if the rated facilities are pre-paid by the borrower, with the lender’s consent. For bank loan facilities such as cash credit, which do not have a scheduled repayment date, the rating is placed on notice of withdrawal for 180 days, and subsequently withdrawn.
8. In case the rated firm does not share information with the agency on regular basis or provide access to its management or discuss annual results, that firm is classified as non-cooperative. If it is believed that the subsequent information provided by the rated firm is inadequate to conduct credit assessment, it may suspend the rating and inform the investors of the same.
9. A substantial portion of the information shared by the rated firm is highly sensitive and is kept strictly confidential by the ratings group and not shared with other divisions or group companies of CRAs.
A credit rating compresses an enormous amount of diverse information into a single rating symbol. A simple alphanumeric symbol, such as ‘AAA’ or ‘A2+’, is normally used to convey a credit rating. (KNN)
Feedback: newsdesk@knnindia.co.in
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