Credit rating models for MSMEs need to be revisited amid COVID-19 crisis: Experts

The credit rating models for micro, small and medium enterprises should be revisited in the wake of the coronavirus crisis as these companies are currently facing the problem of capital erosion, financial experts said on Thursday. Speaking at a webinar organised by Indian Chamber of Commerce, credit information company TransUnion CIBIL managing director and CEO Rajesh Kumar said the MSMEs play an important role in the economy and their rating models should be looked into afresh.

"All rating models have to be revisited in the present scenario arising out of the pandemic. This is more so because capital erosion of the entities has taken place," Kumar said. He also called for the availability of data from the GST system and payment history of the MSMEs, which would help the rating firms to estimate the probability of default.

According to him, access to GST database will be helpful in getting the invoices and understanding the production cycles, supplies, cash flows and bank statements.

"All this information will help estimate the probability of default," he said, adding that of the 50 million MSMEs in India, only ten million are registered with the GST system. CIBIL has already come up with MSME rankings, Kumar said. Central Bank of India managing director and chief executive officer Pallav Mohapatra said rating parameters should undergo change due to the coronavirus pandemic.

"When there is no realisation of sales proceeds by the MSMEs, their cash flows get affected. In such a case, the parameters used for ratings during the pre-COVID period and now should not be the same," he said.

Mohapatra said the working capital cycles of MSMEs are shorter than that of the large companies and they rely largely on borrowed funds.

Tata Capital managing director Rajiv Sabharwal said that the MSMEs have been adversely impacted and they need fund for their businesses. He said Tata Capital is also lending to these entities but the cost of funds is not cheap as compared to banks.