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Rating Methodology

  • The ratings are based on qualitative and quantitative factors, which can be further subdivided into three sub-categories such as business risk, management risk and financial risk.

  • The approach to assessing the risk elements, peer group comparisons, and weightages of various parameters.

Behavioural Risk

  • Under behavioural risk, banks assess the qualitative aspects of the customer, like his age, permanency of residence/business, his repayment history, and other vital aspects related to the consumer's attitude and behavioural pattern.

Business Risk :

  • The bank assesses the sustainability of the business plan and long term viability of the unit.

  • This comprises of assessment of the track record of the business, relationship of customers and suppliers, level of infrastructure and technology of the business.

  • Business risk parameters are mainly high degree of competition, large number of players, low capital intensity, and in some cases lower technology levels.

  • Most SMEs rarely have a control on pricing. Assessing the quality of the SMEs relationship with their customers and suppliers form an important and critical aspect of assesment.

 

 

The SME rating scale is a 5 point rating scale which symbolises the entity's credit worthiness in relation to other SMEs.

 

Performance capability: Financial Strength

 

SME credit RatingsDefinition
SME 1Highest
SME 2High
SME 3Moderate
SME 4Weak
SME 5Poor

 

Financial Risk :

  • SMEs are typically set up as proprietorships, partnerships, or private limited companies

  • The bank's experience suggests that entities whose financial statements are governed by regulation are generally stronger in accounting quality, disclosure, and transparency.

  • Financial risk analysis is based on disclosed financial statements. CRISIL’s assessment of financial risk includes an assessment of size (sales and net worth), profitability, efficiency of capital and working capital management, and credit protection measures such as interest coverage, debt service coverage, and cash accruals to debt ratios.

  • Quikrupee.com uses proprietary spreadsheets that are developed especially for SMEs. The ratio calculations are broadly the same as those followed in the assessment of the large corporates, but have been fine-tuned to suit the requirements of the SME sector.

 

The rating is a one-time exercise. However, we recommend that the user of the rating seek a review of the rating if the organisation experiences significant changes/events during this period which could impact the organisation or its rating.

 

Management Risk :

  • For SMEs, management evaluation, which is typical evaluation of the promoter's competency is a key factor. Unlike a large company with layers of professional competence, SMEs mostly depends on the competency of the promoter, as a key person.

  • In assessing a promoter’s competence and track record as an entrepreneur, banks looks at the past performance of the entity and group companies.

  • This provides an insight into the promoter’s ability to successfully manage the entity through business cycles. In addition, the entity’s ability to develop suppliers, integrate with customers, and manage banking and labour relationships, also provide critical inputs to the management evaluation process. Most SMEs are managed by firstgeneration entrepreneurs, whose continued presence is crucial to the very existence of the business.

  • Banks generally believes that factors such as the presence of a second tier management, a formal succession plan, and a high degree of professionalism, are vital to the long-term sustainability of the entity.

 

 

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