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Enhancing the credibility of MSMEs – Performance & Credit Rating Scheme Presented by Kaushal Sampat Chief Operating Officer, Dun & Bradstreet India Third Tri-nations Summit for Small Business Development 19th Nov, 2008
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Agenda No Topic 1 About D&B 2
Challenges faced by MSMEs and the Role of Information 3 NSIC Rating Scheme and its benefits 4 D&B’s Rating Process and Assessment Methodology 5 Key Rating Insights
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Fast Facts on Dun & Bradstreet
World’s leading provider of business information; Established in 1841; Listed on NYSE; Presence in over 200 countries; Revenue of USD 1.6 bn and market capitalization of USD 4.5 bn; Employs approximately 4,200 people worldwide. D&B owns and maintains the world’s largest and most comprehensive commercial database of over 140 million business entities; Languages/ Dialects covered: 82; Currencies covered: 181; Updated 1.5 million times every day. Our heritage, database and technology makes us the world’s most reliable business information provider.
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About Dun & Bradstreet India
About Us Key Partnerships India’s leading provider of Credit Information, Sales & Marketing solutions & Financial Education. Commenced operations in 1995; Offices in Mumbai, New Delhi, Chennai, Bangalore, Hyderabad, Ahmedabad, Kolkata; Major clients include Banks, Financial Institutions, ECGC, Export Promotion Councils, MNCs, Corporates, Exporters, Importers and SMEs. Set up India’s first Credit Bureau, Credit Information Bureau (India) Ltd with Trans Union, SBI, and HDFC; and public/private sector banks; D&B has successfully partnered with NSIC for the Performance and Credit Rating Scheme Set up India’s first SME Credit Rating Agency, SME Rating Agency of India Ltd with SIDBI, CIBIL and public/private sector banks; Strong alliance with Export Credit Guarantee Corporation of India (ECGC) giving us access to exporters in India. . Indias leading provider of credit information, sales and marketing and financial education How many public private banks – speak with Harshala SMERA – which banks? In the SMERA slide
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D&B India –Rating Experience
D&B India has delivered over 175,000 rating assessments (domestic and global) to banks, government institutions, corporates and foreign entities. Over 75% of the banking referrals have come from India’s largest public sector banks Source – D&B database D&B has carried out risk assessment on over 75,000 Indian entities since its inception. Close to 18,000 ratings assigned on availability of full and latest financials (past 1 year) Over 85% of the assessments carried out by D&B India are MSMEs
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Challenges faced by MSME
Lack of Visibility Low Credit Penetration Unable to tap equity markets Lack of Transparency Lack of Information about potential customers
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Role of NSIC Performance and Credit Rating Scheme in Improving MSME Prospects
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NSIC Rating Scheme Role of Ratings National Small Industries Corporation (NSIC) introduced the Performance and Credit Rating Scheme in 2005. Under this scheme, the government thru NSIC subsidized rating fees to the tune of 75%. D&B and other agencies were empanelled under this scheme to rate SSIs. Under the scheme over 12,000 ratings have been completed since inception of which D&B India alone has carried out about 50%. D&B India has consolidated its MSME ratings with that of SMERA, a rating agency jointly promoted by D&B India solely for rating MSMEs. The new rating is called NSIC – D&B – SMERA ratings Ratings Increase Information Flow Greater Transparency Lesser Information Asymmetry Greater Credit Penetration Greater Growth
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Benefits of Rating to SMEs
Lower approval time Faster disbursement of funds based on 3rd part independent ratings. Greater willingness by banks and financial institutions to lend to better credit profile SME borrowers Interest rates linked to rating of SME Higher rated customers can access funds at lower rates. Lower transaction costs Information asymmetry problems reduced Credit rating assists in simplifying lending norms In some cases, collateral requirements may also be relaxed Credit terms Fund Access Speed Simplified Norms Perception
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Benefits of Rating to Banks
Risk Management Speed Efficiency Consistency Increased Credit Sanctions Quickly handle obvious approvals/declines Less data is required to make accurate decisions Decrease bad debt Reduce exposure to High risk accounts Analysts only focus on difficult accounts Increase volume of accounts Ensure equal, objective treatment of each applicant Apply consistent, objective decisions across the organization Target credit-worthy SMEs for future promotions Increase approval rates
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Rating Scale RATING INDICATORS Financial Strength High Moderate Low
Highest SE 1A SE 1B SE 1C High SE 2A SE 2B SE 2C Performance Moderate Capability SE 3A SE 3B SE 3C Weak SE 4A SE 4B SE 4C Poor SE 5A SE 5B SE 5C
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Rating Fees Turnover Fees per Evaluation Units Pay 25% Upto Rs. 50 lacs Rs. 30,000/- Rs. 7,500/- Rs 50 lacs – Rs 200 lacs Rs. 36,000/- Rs. 9,000/- Above Rs 200 lacs Rs. 48,000/- Rs. 12,000/- (Applicable service tax will be over and above the Rating fees and will be paid by the SSI unit only on the 25% of the fees)
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Rating Process Flow Rating Request Rating Model D&B Database
Request for Interview and site visit Rating Request D&B Correspondents SSI Questionnaire Conducts site visit and interviews Management Public Domain Information Industry Assessment and Cluster data Documentation, audited results and certified projections Site Visit Assessment Report Rating Model D&B Database Third Party Data – e.g. Litigation Information Documents Obtained Rating Analyst External Data Peer Review Final Rating SSI Rating
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D&B’s Rating Philosophy
Statistical Modeling Judgmental Rules Industry Trends HYBRID RATING METHODOLOGY Financial factors based on statistical modeling Qualitative factors based on due diligence and site visit
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Schema of Rating Factors
Rating Factor Schema Financial Parameters Non-Financial Parameters Management Quality Solvency Ratios Liquidity Ratios Profitability Ratios Activity Ratios Trend Analysis Location Advantage Marketing Network An exhaustive list of qualitative and quantitative factors considered for rating. Each financial parameter is benchmarked within its industry-size peer group Legal Issues Industry and Macro-Economic Assessment
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Financial Benchmarking
Raw Financial Ratios Relative Factor Score D&B Industry Benchmark Database
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Indicative Non-Financial Parameters
Shareholding Management Age Marketing Network Legal Employee Count Industry growth Competitive forces Industry Trade & Credit Terms Each non-financial parameter is characterized by objective categories which is scored
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Information Challenges & D&B’s Approach to Mitigate the Same
D&B’s Initiatives Unwillingness to sharing information in the absence of Inquirer details. Non-existence of National level central repository of information for Proprietorship and Partnership concerns which constitutes approx. 85% to 90% of business universe in India. Filing requirements are not mandatory for Proprietorship and Partnership concerns. Though mandatory under law, some private limited companies do not file or update relevant information / return with company registry which results into non-availability of the latest information. In most cases, reluctance to share financial information, information pertaining to customers, suppliers, etc. though they generally share other operational or non-financial information. Increasing pan-India correspondents to 30 from 18 that existed a year back. Implementation of correspondents’ evaluation system – witnessing a marked improvement in Service levels. Increasing awareness amongst SMEs on the benefits of figuring in D&B’s global database Proactively refreshing data/information pertaining to frequently enquired companies Migration of registry from physical to electronic format has resulted in increased efficiencies in the information gathering process.
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NSIC - D&B - SMERA PC RATING SCHEME ENHANCED VISIBILITY & SALES
D&B: Global Advantage EXPORTER / SSI BANK FINANCE BETTER TERMS NSIC - D&B - SMERA PC RATING SCHEME BANK D-U-N-S NUMBER D&B GLOBAL DATABASE ENHANCED VISIBILITY & SALES
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Some Global companies that depend on D&B for evaluating suppliers
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D&B Insights on Rating Assessments Carried Out
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Region-wise spread of Rated SSIs
D&B has rated over 5,000 SSI units under the NSIC scheme since inception
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State-wise spread of Rated SSIs
SSI clusters in Maharashtra and Tamil Nadu have been very receptive to the NSIC scheme Third Tri-nations Summit for Small Business Development 19th Nov, 2008
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Distribution of Rated SSIs based on Legal Status
The NSIC Scheme appears to be most popular among SSIs that are incorporated as Private Limited Companies
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Distribution of Rated SSIs based on Sector / Line of Business –Top 80%
Top 3 Sectors/ Lines of Business of rated entities: Industrial Machinery & Equipment Fabricated Metal Products Chemicals & Allied Products Sectors/ Lines of Business are as per globally accepted Standard Industrial Classification Code
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Distribution of Rated SSIs based on Sales Turnover
SSIs with higher sales turnover were early adopters of the NSIC Scheme The NSIC Scheme is gradually gaining popularity among the other segments Figures as per most recent financial statements provided by SSIs
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Distribution of Rated SSIs by Employee Count
Nearly 50% of the Rated SSIs have more than 50 employees
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Top 10 Export Destinations for Rated SSIs
Nearly 48% of the Rated SSIs are exporters
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Customer Feedback
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Customer Feedback “I would like to take this opportunity to thank NSIC for initiating such a positive and encouraging scheme to every individual SSI unit across India. This scheme has clearly made me realize and analyse my strengths and areas of improvement after being in the business for more than 3 decades.” Mr. Chinnraj, Director - Madras Hardtools Pvt. Ltd., Chennai
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Customer Feedback “Our experience of the rating process has been excellent and we are quite happy with the smoothness with which the entire procedure was completed by D&B” Mr. Arun Goela, Dy. Managing Director & CEO Swastik Knits Pvt. Ltd., Noida
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Thank You
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