Most of the SMEs lack proper financial reporting systems leading to non availability of credit from banks. Credit ratings which can be defined as assessment of credit worthiness of the business based on industry comparables as well as non quantitative variables can benefit both parties by coming up with uniform standards. Credit ratings help financial institutions to get an insight of the strengths and weaknesses of an SME making it possible for them to take a quick-decision.

The ratings track record in India is not very encouraging as many small firms depend more on the advice of brokers and recommendations of others whom they consider to be experts. Even large corporate get credit ratings done as the regulators like SEBI have made in mandatory for publicly listed companies in order to access debt financing. Only in recent past adoption of international standards like Basel II has made it mandatory for any business having an exposure of Rs. 5 crs plus to get credit rated. This has lead to an increased trend in credit ratings among large and medium size corporate.

The credit-rating of SMEs is determined by balance sheet size, sales turnover, growth trends and credit limits enjoyed by them.

The credit concerns have led to more interaction between SMEs and banks on this issue. The concerns of credit professionals can be summarized as under:

• The need to establish a “credit risk differentiation process” whereby it becomes possible for financial institutions to evaluate credit risk involved in a small, medium and large SME segment so that they can increase the lending to such business segments.
• Low rated SMEs to be differentiated into a different pool altogether and then funding them accordingly based on some parameterized schemes.
• Development of modules that can be used to conduct credit quality tests of banks and asset quality tests of SMEs.
• Empower front end credit managers to take decisions of credit delivery in order to speed up the process.
• To develop robust internal policies on SME lending so that the conceptual framework is kept free from ambiguities. SME need to be financed more based on their ‘business and revenue’ models and less based on collaterals.

SMEs play a very significant role in the growing Indian economy. There are around 13.6 million SMEs in India that contribute to over 45% of the industrial output. With consistent growth in bank credit, SMEs are more optimistic and starting to increasingly adopt credit ratings.