Faulty Credit Rating by Banks puts additional collateral burden on MSMEs
Updated: Sep 03, 2015 11:49:59am
New Delhi, Sept 3 (KNN) It is not double but triple whammy on Indian MSMEs. While they are reeling under a sluggish demand and huge receivables from buyers, the Banks first forced the MSMEs to go for a third party credit rating and then ask for additional collaterals citing the rating by the credit agencies.
The moot point is a typical entrepreneur hypothecates his last asset to get a reasonable credit limit from the Banks and in absence of further generation of funds, (s)he cannot provide additional collaterals. In fact most of the MSMEs are finding it hard to service the existing credits, forget about creation of additional funds.
There could not be a heavier body blow to the ‘Make in India’ mission of our Prime Minister. When the MSMEs are gearing up to ‘Zero Defect Zero Effect’ concept to make India a hub of manufacturing, the Banking system is putting all types of hurdles to make survival of enterprises difficult, forget about growth.
Research by the FISME team has brought out that MSMEs all over the country are being asked to put in additional collaterals, even for the existing credit limits. According to some sources for a loan of Rs 1 crore sometimes Banks are asking for collateral for Rs 2.5 Crore, if the credit rating of the enterprise is BBB+, a technical term for a ‘just satisfactory’ loan account.
Banks are citing the requirements under the Basel – II norm, an international standard for banking operation, which specifies, collateral requirements for loan accounts of different credit rating. Lower the rating, more the collateral requirements.
However, the systemic fault here is the credit rating format is made in such a way that an MSME, even in a very healthy financial condition, will never get the AAA, the highest rating, when they are not required to provide any collateral at all! Analysis by FISME team shows that, by design or mistake, the rating parameters are loaded against MSMEs in such a way that out of, say, 100 marks, they are eligible for maximum 60 marks only. No surprise that most of the MSMEs are laggards in the present rating system.
The recent failures of large corporates tell another story about the credit rating system. Without a satisfactory credit rating they must not have received such huge credits from Banks. So how they failed and still failing. And the Bankers, hit by the huge corporate bad debts are targeting the MSMEs for imposing financial discipline!!
FISME, the lead Federation of Indian MSMEs has already drawn the notice of the Government to the differential treatments by the Banks to the MSMEs vis –a- vis the large corporates. The defects in the present credit rating system have also been brought forward. Only an immediate action may save the MSME sector from a complete collapse. (KNN Bureau)
The moot point is a typical entrepreneur hypothecates his last asset to get a reasonable credit limit from the Banks and in absence of further generation of funds, (s)he cannot provide additional collaterals. In fact most of the MSMEs are finding it hard to service the existing credits, forget about creation of additional funds.
There could not be a heavier body blow to the ‘Make in India’ mission of our Prime Minister. When the MSMEs are gearing up to ‘Zero Defect Zero Effect’ concept to make India a hub of manufacturing, the Banking system is putting all types of hurdles to make survival of enterprises difficult, forget about growth.
Research by the FISME team has brought out that MSMEs all over the country are being asked to put in additional collaterals, even for the existing credit limits. According to some sources for a loan of Rs 1 crore sometimes Banks are asking for collateral for Rs 2.5 Crore, if the credit rating of the enterprise is BBB+, a technical term for a ‘just satisfactory’ loan account.
Banks are citing the requirements under the Basel – II norm, an international standard for banking operation, which specifies, collateral requirements for loan accounts of different credit rating. Lower the rating, more the collateral requirements.
However, the systemic fault here is the credit rating format is made in such a way that an MSME, even in a very healthy financial condition, will never get the AAA, the highest rating, when they are not required to provide any collateral at all! Analysis by FISME team shows that, by design or mistake, the rating parameters are loaded against MSMEs in such a way that out of, say, 100 marks, they are eligible for maximum 60 marks only. No surprise that most of the MSMEs are laggards in the present rating system.
The recent failures of large corporates tell another story about the credit rating system. Without a satisfactory credit rating they must not have received such huge credits from Banks. So how they failed and still failing. And the Bankers, hit by the huge corporate bad debts are targeting the MSMEs for imposing financial discipline!!
FISME, the lead Federation of Indian MSMEs has already drawn the notice of the Government to the differential treatments by the Banks to the MSMEs vis –a- vis the large corporates. The defects in the present credit rating system have also been brought forward. Only an immediate action may save the MSME sector from a complete collapse. (KNN Bureau)
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