Credit Rating for SMEs by Chartered Accountants as a Value Added Service:
Chartered Accountants are the BEST to give credit rating to any business/other entity.
We can compare the Financials of a business entity from period to period between similar entities in one industry, analyze the liquidity, solvency and other ratios thoroughly.
CMA data is almost standardized across the various Financial Institutions and Software packages are readily available.
The big Credit Rating Agencies like CRISIL, ICRA, CARE, sponsored by All India Financial Institutions, Banks and some having tie-ups with International Agencies are doing the Credit Rating for borrowers enjoying Rs.500 lacs and above credit facilities from the Banks, Financial Institutions and are charging almost 6 digit figures as their fees. Although they may give some special value addition but mostly they do the mechanical work of analyzing the past AUDITED Financials.
Most of the borrowers feel that the fees charged by the big Credit Rating Agencies is too high. Sometimes the borrowers rating may be so poor, the Bank / FI will charge the higher interest rate. When the draft report is referred to the borrower for his comments / additional information sometimes the borrowers choose not to respond as they know that they will get only a poor rating thinking that the fee will be an added burden in addition to higher interest. That is they feel if they do not get credit rating Bank / FI will charge some extra %-age interest. (This is what I have personally observed in one of my client’s case and in this case even the top management of bank advised him, orally, not to take the rating as ‘no rating’ is better than ‘rating proposed by the rating agency’ with reference to interest rate).
To quote (his interview published in The Hindu Business Line, dt.27.02.2012 at page 4) Mr. Sachin Nigam, Director, SME Ratings at CRISIL, the first advantage of securing a rating i.e., interest rate benefit is not felt by my client and the second advantage of bankers willing to increase the credit limits for the SME are to be tested as per the facts in each case. In this article the correspondents asked the Director as follows:
“If the benefits are so tangible then why do 60 per cent of your clients not come back for renewing their ratings?
His reply is as follows:
“40 per cent (who have renewed ratings) is a big number. THERE COULD BE REASONS FOR CLIENTS NOT SEEKING RENEWALS (emphasis supplied by me). Not all the Companies who get rated get good ratings.
Let us analyze the reasons for which he has no clue and the fact that all Companies may not get good ratings. Here let us find an opportunity to our Chartered Accountant fraternity in the form of Credit Rating at an affordable fees to the borrower as well guide him how best to improve his ratings.
In one of my clients case we studied the credit scores given by the banker and advised the client to submit a) the monthly stock statements within the stipulated time, b) to get his books Audited early and submit the Audited Financials, Project Report even for renewals, CMA well before the DUE DATE for renewal of limits and c) increase his capital in order to improve the Solvency Ratios etc., and he is a happy customer of the bank and recognized our advise very-very positively.
I only say that a Chartered Accountant OR a Firm of Chartered Accountants can do 60 % to 75 % of the work, if not more, of desk checking being done by the big credit rating agencies with no less competency. But the big credit rating agencies may have some research and other special inputs. If the Institute of Chartered Accountants of India takes initiative of entering into some tie-up with one or more credit rating agencies the benefits will be as follows:
1. The borrower can be charged less fees than that being presently charged.
2. The credit rating agency will have local partners and they can do the job fast and they can pass on the savings in traveling from Mumbai to units place in the form of lower fees and the local Chartered Accountant will help them by coordinating with the borrower and do the CMA or other desk checking instead of their employees to whom salaries is a standing overhead whereas for the local CA on a case to case basis, i.e., a variable expenditure.
3. The local CA is also benefited by way of professional work outside the compliance work (Section 44 AB Audit, Company Statutory Audit) and he can concentrate on value addition to clients.
This is my humble request to the President of ICAI, all Central Council Members and the Chairman, Committee for Capacity Building of CA Firms and Small & Medium Practitioners to think over seriously in the interest of borrowers and members and help the big credit rating agencies as well the Banks/FIs.