S I B M : Manipal

SMALL AND MICRO ENTERPRISES RATING AGENCY

SME Rating Agency of India Limited (SDMERA) is a joint initiative by Small Industries
Development Bank of India (SIDBI), Dun & Bradstreet Information Services India
Private Limited (D & B), Credit Information Bureau (India) Limited (CIBIL) and several
leading banks in the country.

SMERA is the country’s first rating agency that focuses primarily on the Indian SME
segment. SMERA’s primary objective is to provide ratings that are comprehensive,
transparent and reliable. This would facilitate greater and easier flow of credit from the
banking sector to SMEs.

WHAT IS A SMERA RATING?

• SMERA Rating is an independent third-party comprehensive assessment of the
overall condition of the SME, conducted by SME Rating Agency of India Ltd.
• It takes into account the financial condition and several qualitative factors that
have bearing on credit worthiness of the SME.
• SMERA Rating consists of 2 parts, a Composite Appraisal/Condition indicator
and a size indicator.
• SMERA Rating categories SMEs based on size, so as to enable fair evaluation of
each SME amongst its peers.
• An SME unit having SMERA Rating would enhance its market standing amongst
trading partners and prospective customers.

WHY SMERA RATING?

Wide Recognition and Acceptance:
With each bank having separate rating processes and disclosure requirements for the
purpose of disbursing loans, SMEs find themselves spending significant time, effort and
money while approaching different banks for credit.

As SMERA would adopt a comprehensive, transparent and reliable rating process, it

would have a wider acceptance within the banking system of the country. In addition to
this, SMERA would be supported by SIDBI and a large number of public and private
sector banks in the country. Such wide acceptance would result in SMERA Ratings
becoming a key requirement in the loan application process. It will also simplify the
process of credit requests and make the process more cost-effective.
Favourable borrowing terms:
A better rating from SMERA could lead to more favourable credit terms for the SME.
This could include:
• Lower collateral requirements.
• Lower interest rates.
• Simplified lending norms
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Faster Access to Credit:
SMERA Rating facilities banks/lending institutions in reducing the turnaround time in
processing credit applications, thereby providing SMEs access to timely and adequate
credit.

Fair evaluation amongst peers:

SMERA Rating categorise SMEs based on size, so that each SME is evaluated amongst
its peers. This enables rational comparison of companies of the same size, thus ensuring
that the smaller companies are not at a disadvantage while applying for credit.

Industry-benchmarked ratings:
SMERA Ratings take into account industry dynamics by factoring in a system through
which an SME could compare its strengths and weaknesses with those of other
companies in the same line of business. This is done through statistically derived
industry benchmarks for various ratios.

SMERA Rating Scale:

Composite Appraisal/Condition:

1 Highest
2 High
3 Above Average
4 Average
5 Below Average
6 Inadequate
7 Low
8 Lowest

SMERA (B) (1)

Size Indicator (Based on Net Worth)

A INR 20 Crore and above

B Between INR 5 Crore and below INR 20 Crore

C Between INR 1 Crore and below INR 5 Crore

D Less than INR 1 Crore

 S I B M : Manipal

Micro, Small and Medium Enterprises and Development (MSMED) Act , 2006
LENDING TO SMEs

After discussing for over a year, the Small and Medium Enterprises and
Development (SMED) Bill morphed into Micro, Small Enterprises and
Development (MSMED) Act AS ON 16 June 2006. This is a major piece of
legislation which will have an impact over 12 million small scale enterprises,
employing more than 30 million people. The MSMED Act is a follow up of the
Gupta Committee report emphasizing a need for a single legal framework to cover
all legal issues of small scale enterprises.

Important provisions of the Act

Under the Act (Sections 3 to 6) , it is proposed to set up National Board for Micro,
Small and Medium Enterprises which will have its head office at Delhi. The Board
shall consists 100 members with Minister in charge of the Ministry as Chairman.
The Board shall meet at least once in three months . The Board is also expected to
examine the factors affecting the promotion and development of Small and Medium
Enterprises and review the policies and programmes of Central Government and
enhancing the competitiveness of such enterprises and recommend to Central
Government suitably.

It introduces the concept of ‘enterprises’ in place of ‘ industries’. These are

classified into two categories i.e .manufacturing and services.
Manufacturing Services
Investment in plant machinery Investment in equipments
Micro Enterprises upto Rs.25 lac up to Rs.10 lac
Small Enterprises above Rs.25 lac upto Rs.5 crore above Rs.10 lac upto Rs.2 crore
Medium Enterprises above Rs.5 crore upto Rs.10 crore above Rs.2 crore uptoRs.5 crore

While calculating the investment in plant , machinery and equipment , the original
costs are to be considered excluding land and building ,cost of pollution control ,
research and development , industrial safety devices , etc.

The important provision of the Act relates to the delayed payments to micro and
small enterprises. Under sections 15 and 25 , the buyer of goods and services has
to settle the payment to the supplier (micro or small scale enterprise) as agreed
upon or not more than 45 days space ( currently 120 days) from the date of
acceptance of goods, failing which the buyer has to pay compound interest with
monthly interest to the supplier on that amount from the appointed day or from
the date immediately following the date agreed upon at three times of the bank
rate , as notified by the Reserve Bank of India. Such interest is not eligible for
Income Tax deduction. The buyer is also to furnish details of the amount due to
micro small enterprises in the Annual Report.
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Any dispute in this regard have to be referred to the Micro and Small Enterprises
Faciltitation Council , specially set up under the Act. This should be done within
90 days from the date of reference.
As per MSMED Act notification , for the enterprises with investment in plant and
machinery upto Rs.25 lac have to be registered as an SSI. This is expected to be
done within 180 days from the date of commencement of the Act,ie.October2 ,2006.
Registration is voluntary . But for those units planning to avail of incentives from
the Government , SIDBI, NSIC , Bank etc under the various schemes, it is mandatory.

Benefits of the Act

01.It provides an opportunity for the Industry Department in the State Government to
creat the latest data base of Micro and SSI enterprise which go in for registration.
02.The provision will bring lot of pressure on large companies to settle dues to
these enterprises within 45 days from the date supply of materials.
03.It would enhance the competitiveness of the Micro and Small enterprises.
04.It would help these enterprises to file their complaints , if any ,and resolve
disputes with the tribunal.

Limitations of the Act

01.The Industry Department of State Government is not presently adequately
equipped since the process of computerization is slow, besides the same being
rigid in the style of
02.About 57.3% enterprises are not registered and nearly half of them are not
interested. In registration.
03 Many of the enterprise do not maintain books of accounts.
How to motivate them to go in for registration.
04.Medium scale enterprises are not covered under priority sector lending by the
banks which would reduce their competitiveness.
05.Doubts are expressed about the willingness of ancillary units to make complaints
against large companies.

The efforts put in by the Government in enacting the MSMED Act are certainly
praiseworthy especially when the SSI sector is growing at around 12 percent
during the Tenth Five Year Plan.