Credit Rating Rule for SME Long-term Loans Could go

The Reserve Bank of India (RBI) is likely to relax the mandatory credit rating requirements on long-term loans to small and medium enterprises (SMEs). The move comes amid a merchandise exports plunge, necessitating credit availability to small firms contributing nearly half of the country’s total exports.

Despite their classification as priority sector, SMEs find it tough to get bank credit. Before sanctioning long-term credit, banks ask SMEs (as also other companies) to produce ratings on their credit profile and repayment capacity from agencies like Crisil, Care and Fitch. “A suggestion has come from the SME industry that mandatory ratings requirement should be waived for large credit accounts,” a government official said. This would lower credit costs of SMEs.

“The issue is how to make credit available to SMEs without hassles and less transaction costs. The government is discussing the issue. We will provide some relaxation shortly to boost SME financing,” the official said. He said easing such constraints is important especially in the backdrop of an economic slowdown. India's manufacturing growth has slumped in recent months, pushing GDP growth to a nine-year low of 5.3% in the last quarter of 2011-12.

The RBI may advise banks to conduct internal assessments of prospective borrowers rather than relying on agency ratings. “The move is coming a bit late. The rating requirement should have been removed long ago. Banks should lend to SME exporters immediately on presenting a letter of credit or confirmed order,” said Delhi Exporters' Association president SP Agarwal.

SMEs contribute significantly to exports, which started contracting in March. Analysts expect export growth to touch 10-12% in 2012-13 from 21% in 2011-12. “MSMEs are the foundations of the economy. They need to be supported in every manner,” financial services secretary DK Mittal said last week.

Ramu S Deora, an exporter and chairman of GAmphray Laboratories, said the government should direct banks to enhance limits for dollar credit to Indian exporters. SMEs, with their low revenue base and limited market access, are more vulnerable to internal and external shocks. Recently, the markets regulator allowed setting up an SME Exchange to enable such firms to raise funds through IPOs. Only 8.5% of bank loans go to SMEs.

Financial Express, New Delhi, 25-06-2012