Credit Rating- Not a burden, rather tests the endurance of your firm

ecently I met a third generation businessman who has been very successful in his business and has been highly reputed for his prompt repayment of obligations including bank loans. He is a very prudent borrower and practices zero tolerance for any financial indiscipline. He has given a significant amount of collateral security for his loans. He expressed his anguish at the bank for insisting or rating by external rating agencies (like CRISIL) otherwise called in banking parlance as ECAI rating. His contention is- having been such a prompt borrower and given so much of collateral securities for bank loans, insisting for a rating of loans is a mere burden and having no tangible benefits.

He is the not only one have this opinion about credit rating. There are many entrepreneurs believe that rating is an additional burden and only a compliance requirement for borrowing from banks.

Rating Agencies:

This is commonly known to all SMEs about the agencies involved in rating. There are two streams of rating such as SME rating with or without NSIC funding which is primarily targeting to promote rating culture among small businesses in India. The other one is ECAI rating that is rating agencies accreditated with RBI, undertake rating and such ratings are referred to by Banks for allocation of capital for loans and advances and applicable for loans above Rs 5 crores. The rating agencies approved are CRISIL, CARE Ratings, ICRA, India Ratings, SMERA and Brickworks Ratings.

The scope of rating exercise:

The primary objective of the rating is assessing the creditworthiness of rated entity. This gives comfort to lenders, suppliers, investors and other stakeholders otherwise a sense of insight into the rated entities. It reflects upon the ability of the entity to endure the challenges in the course of its business.

Under rating exercise, the firm will be analysed internally and awarded rating according to particular firm’s creditworthiness, its management team and effective relationship with customers and suppliers. The rating reflects the rated entity’s creditworthiness adjusted in relation to other SMEs. The rating exercise generally reviews firm’s state of affairs on Financial, Management, Business, Industry and other risks. Generally, the framework comprises the following aspects:

  • Business risk analysis is an assessment of firm’s sustainability and stability to withstand adverse business conditions. It includes the business fundamentals of rated companies, the characteristics of the industry it operates, its competitive market position in the industry and its operational efficiencies.
  • Financial risk analyses the sustainability and adequacy of cash flows with particular emphasis to debt servicing ability of rated entities. It includes an assessment on how the business strengths of the rated entities will translate into the present and future financial performance and its financial flexibility with a particular emphasis on its liquidity.
  • Any firm’s performance is significantly determined by the management goals, plans and strategies, capacity to overcome unfavourable conditions, staff’s own experience and skills, planning and control systems etc. Under management risk, these aspects are critically examined.
  • They also factor in the parent groups ability to support if need be. If the firm to execute new project they analyse the ability for the company to meet the financial obligation and flexibility to raise the capital.

What rating does- Unravel the true state of affairs in your firm:

As we discussed initially, it is generally observed that SMEs look upon rating as a precursor for borrowing and it has no other relevance for their business. It is not so. The rating brings in much larger benefits. Few of the benefits are enlisted if rated:

  1. Figure out systemic risk: Normally entrepreneurs busy focusing on the day to day operations. They normally will not give much attention to risk management. This may lead to a situation wherein the risk keeps growing in the backyard and they may not be aware of it. While doing the rating, rating analysts discuss 360 degrees of organisation’s makeup and identify the key risk the company exposed; be in the operations, finance, etc.
  2. Unbiased third party review: Rating is third party assessment and expected to be an objective test of organisations’ capability to deal with unforeseen developments. Normally entrepreneurs being proud of the achievement and/ or wary of competitors may avoid sharing about the challenges. Rating agencies do help in this situation by alerting him on risks if challenges are left unattended.
  3. Preparedness check: Rating check the preparedness for a new strategy which an entrepreneur planning to implement; be it- raising funds, seeking investment or looking for a partner. In every transition strategy rating assists by testifying about the credentials of the company.
  4. Building identity: As the time passes, the company will grow in size, identity, and brand. Prudent entrepreneurs should allow his company to find root on its own like how he expected children to do on attaining teen. Rating is such an exercise helps the business stand out itself in the comity of others in the same industry. Good rating attracts new customers or suppliers.
  5. Rating eases fundraising: It is commonly observed that all banks and NBFCs are adopting a process-oriented approach to loan than relationship based decision or basing the decision on collateral securities. Thus it is imperative for an entity to ensure it is rated better to secure funding at lower cost and quicker timeframe.
  6. Improve Governance (Tool for introspection): As mentioned earlier, entrepreneurs are majorly focusing on day to day operations. They feel everything else is a non-issue. This may make their organisation vulnerable to frauds, mischief by the employee and other interested persons. Rating provokes introspection and sensitises entrepreneurs on the level of governance and in turn help to improve the organisational processes.
  7. Credible source: The rating agencies are reputed for their integrity and process orientation. It is widely held view that their observations and recommendation if implemented will improve the standing of rated entities.

Never miss an opportunity to interact with Analysts:

Normally rating analysts are assisted by functional heads while undertaking rating process and also they interact with management. We suggest that entrepreneurs may spend more time with analysts to understand the gaps, best practice in the industry, competition and new opportunities.  Rating analysts are well qualified to make in-depth research in the areas of their speciality. Further, they work on multiple assignments. You may benefit from their experience to improve on various parameters.


Credit rating is an important exercise to ensure sustainability of your organisation and prepare to face any adverse internal or external challenges. Well rated entities always attracted investor or lenders even in adverse situation. If the rating is not satisfactory, look at gaps or reasons and strive to improve upon leading to overall improvement in the endurance level of organisation.