The Hindu Business Line : ICRA sets up cell in Chennai to rate small, medium units

, Mr P. K. Choudhury, Vice-Chairman and Group Chief Executive Officer of ICRA, told Business Line that “Usually the ratings of large corporate entities are for debt and other financial instruments, whereas the preference in case of MSMEs is more for rating of an entity as a whole. In case of Bank Line of Credit rating under Basel II it is for the specific Line of Credit whereas under NSIC Scheme of SME rating, it is for the entire borrowing programme of the concerned entity which is rated.”

Problems at hand

Mr Choudhury, however, pointed out that there were problems in rating MSMEs because the quality and reliability of information available with them were not always of high standards. “This calls for extensive due diligence and process of validation and cross verification of data and information, which makes the process quite expensive. Also MSMEs usually need considerable amount of guidance and hand holding for data preparation, etc,” he said.

There had been suggestions to outsource the due diligence work, but experience had shown that consistency and quality of such work often left much to be desired.

Cluster approach

ICRA, he indicated, would prefer to pursue a cluster approach while rating the MSMEs. For example, in Tirupur, instead of rating one entity at a time, it would like to carry out the ratings of five to six entities at the same location and preferably in the same industry so that some of the common expenses are distributed over a larger number of entities.

The model could be replicated in other places also, such as for foundry units in Howrah, he said.

The cluster approach, he felt, would yield economies of scale and also help bringing down the operational expenses. “The banks with a focus on MSME financing would often approach us for help,” he said.

Equity grading

In reply to a question, Mr Choudhury said ICRA had no immediate plans to launch any equity grading tool as the market needed to be watched for a little longer. He, however, pointed that his organisation was almost ready with an equity grading product. He said that Earning Prospects Risk Analysis (EPRA) was launched for grading equity as early as 1996. It was a two-dimensional model, having both risk and return components. But the response from the market to the product did not come up to the expectation of ICRA, presumably because the market at that time was not mature enough.

“The situation has vastly changed since then and the large organised wholesale investors might now look for something about the market, which is now very different from what it was a few years ago. The organised investors may like to look at the independent views and professional analysis as an input for their decision making process,” he said.

Precisely for the same reason, ICRA’s equity grading tool for the present market would be different from what was launched some 13 years ago. “The old product has to be restructured to suit to the requirements of the present day condition,” he added.