Saturday, June 11, 2011

Credit Rating Agencies and SME sector in India

B. Yerram Raju*

Credit rating agencies (CRA) are organizations that rate the creditworthiness of a company or a financial product, such as a debt security or money market instrument. CRAs attracted the ire of the investors in the context of the global financial crisis and the Securities Exchange Commission of US also reformed them after long debates in the Senate. Alive to such ongoing debates, SEBI’s disclosure norms relating to rating agencies in 2010 received wide appreciation. These would apply to corporate credit ratings. When we have integrated with the financial system globally, we need to see what reforms are round the corner in making assembly line credit flows to the corporates and SMEs, more effective.

Lakhs of crores involved in scams notwithstanding, the economy is on the growth trajectory clocking 8.25 percent growth with a seesaw growth in manufacturing sector. Micro, Small and Medium Enterprises have a special dispensation at the hands of the regulators and there is a Ministry at the Centre dedicated to this sector to ensure its development mainly because of its potential to contribute to the job growth and growth of the economy. Growth of this sector always outstripped the growth in manufacturing sector. After redefining the sector in the MSME Development Act 2006, there is enough evidence to show that Banks moved to medium enterprises swiftly. SIDBI, the Bank dedicated for micro, small and medium enterprise credit also moved to medium enterprise credit and totally ignored the micro and small enterprise credit. Equating micro finance with finance to micro and small enterprises is a fallacy. RBI’s published statistics for 2009-10 show that the variance in credit outstanding to the MSE is 22.1% and medium enterprises is 8.6%. The Banks seemed to have hurriedly corrected their portfolio in this area in 2010-11: MSE credit has fallen to 11% and medium enterprise credit increased from earlier 8.6% to 39.2%. This could mean two things: there is migration of the small sector to medium sector – and if it happens, it is the best thing to happen for the economy. The other, Banks started distancing from the micro and small, because lending to them involves higher transaction costs and greater supervision. This is not good for the economy, as these are the seedbeds of entrepreneurship and employment. Medium enterprise credit is rating driven, thanks to the Basel norms.

The Chartered Financial Analysts did a global survey in 2009 to confirm that the ratings are not useful instruments to take investment decisions, irrespective of who delivers Fisch, Moodys, Standard & Poor etc. Although debt rating started late in India, and these rating agencies with their compatriots, CRISIL, ICRA etc., were only rating investments in the past, they are the most respected rating agencies recognized by the regulator, RBI even in India.
Most Banks, which are wont to go by the advisory of the RBI, have now come to swear by them. Most Indian Banks also moved to template lending or Assembly line approach to lending through the Centralized Processing Platforms redefining their approaches to do due diligence of the enterprises they finance. Speed has become the essence of the game of competition among banks. Now that the futures markets and derivative markets have become more active than before, and their late entry into debt rating is more by patronage of the Banks and FIs, it is important that the other regulator – RBI- also looks at the Report Card on rating agencies and resolve certain inherent conflicts. The Credit Information Services are at a nascent stage, CIBIL being the first to start such service with collaboration from Dun & Bradstreet and many commercial banks. Transparency in client information is a long way to go, as unshared data is more than the shared data both about individuals and institutions. In this scenario, the RBI also should consider issuing detailed instructions on rating agencies, their ways of assessment, forms and reports in the public domain. In any case, it is desirable that until the credit information repositories scale up in size and efficiency in providing the required data to reduce the information asymmetry, the rating instrumentality application to the SME sector has to be put on a low key.
In India, the track record of the Rating Agencies may not have much to show up in favour or against them. There is no evidence of any of the rating agencies reducing the ratings to any large industrial enterprise on the ground that they owe monies to their vendor SMEs for more than the contracted period for all payments of more than Rs.2lakhs as required under the Companies Act, 2000. The RBI should actually insist on different rating agencies for rating the Corporates and their related SME vendors. It is also desirable that the payment for rating agencies should come from the institutions that seek rating. It is a different matter if such amount is later recovered from the liability firm.
In essence, there should be a mechanism to evaluate the performance of Rating agencies. Further, the method of payment also needs to be linked to the extent possible to evaluation. Their services have value but to what extent one should depend on their rating also needs to be quantified. There should be a recompense clause and the rating agencies should be made to compensate may be, not to the full extent, but by way of penalty for wrong ratings or variance in rating on a large scale. Their rating performance over a period has to be made transparent for the benefit of investors and for every one connected to evaluate.
It is time that the Banks go back to basics and do due diligence and seek support from the CRA just as yet another support for their credit decision until full scale reforms in credit information and credit rating take off in the financial sector.
------------------------------------------------------------------------------------------------------------*Dr.B. Yerram Raju is an economist and Regional Director, Professional Risk Managers’ International Association (PRMIA), Hyderabad Chapter. Can be reached at

Credit for Agriculture and MSEs on the decline in 2010-11



The dwindling share of agriculture in the nation’s GDP, now oscillating between 16 and 17 percent notwithstanding, people dependent on agriculture continue to be hovering round 60-62 percent. Agriculture sector recorded a 5.7% growth within the overall 8.6% GDP growth. Growth in manufacturing sector continues to be a concern although the growth in MSME sector exceeded the growth in manufacturing. Growth in employment improved in the services but it continues to be a concern in manufacturing sector. In this scenario, the RBI’s annual monetary policy chose to bypass the falling credit in agriculture and MSE sectors by telling that the sectoral growth moderated while the commercial growth picked up. It also mentioned that the “credit conditions generally remained supportive of economic activity”. When agriculture production and small enterprise production increased as reflected in their growth rates, if credit for these credit-sensitive sectors declined, the deficits are made up obviously through some other channels. The private moneylenders are active and before there is another spate of suicides, these deficits should serve as a wake up call. Analysis of the factors responsible and actions necessary are worthy to enquire.

Farmers are on the streets, but not without reason. There is increasing demand for inputs in the context of favourable monsoon during the last two seasons. We witness farmers crying over the inundated paddy stocks in market yards in Andhra Pradesh as the storage godowns fall short of the demand. The other day, valuable chilly stocks were fully burnt out in the cold storages in Guntur. Cotton farmers bemoan of traders holding seize of the markets to deny them the due price. Lack of planning stares at us in every area concerning agriculture, from production to marketing.

The Banks show up the mandated 18% credit to agriculture in figures. UCO Bank claimed Rs.4000crores given to Rural Electric Corporation as credit to agriculture. The RBI was quick to instruct the bank to correct the classification. There are many banks camouflaging the figures whereby the corporate credit is shown under credit to direct agriculture and claim having met the mandated requirement. RIDF any way shields the shortfall. Both NABARD and RBI stopped monitoring the flow of credit to small and marginal farmers and tenant farmers. Investment credit for agriculture – direct has been progressively on the decline during the last ten years, indicating fall in private capital formation in the sector. The latest statistics of RBI relating to flow of credit to agriculture are very revealing. Year-on-year variation for agriculture and allied activities even after all the window dressing by the banks has crest-fallen from 22.9% in 2009-10 to 10.6% in 2010-11. This actually represents the fall in stock as the variance is in terms of outstanding credit. Quarter to quarter variation in farm credit between December and March in any year, does not make much sense as this period mostly accounts for recoveries barring a few cash crops like sugarcane.

For a change, let me look at another area of the priority sector – the micro and small enterprise credit portfolio. This is a sector where guidelines were issued to cover at least five new units per branch per annum. There is no evidence that this guideline has ever been monitored by the RBI. SIDBI the Bank dedicated for micro, small and medium enterprise credit also moved to medium enterprise credit and totally ignored the micro and small enterprise credit. During the year, 2009-10 the variance in credit outstanding to the MSE is 22.1% and medium enterprises is 8.6%. The Banks seemed to have hurriedly corrected their portfolio in this area in 2010-11: MSE credit has fallen to 11% and medium enterprise credit increased from earlier 8.6% to 39.2%. The job oriented and production intensive micro and small enterprises also took a beating at the hands of the dexterous and enthusiastic bankers. Similarly, one will be astonished at growth in financing to NBFCs by Banks, which has increased from 14.8% in 2009-10 to 54% in 2010-11. This is nothing but lazy banking. Quite likely, that the NBFCs are financing the Agriculture and MSE sectors at high rates of interest. This needs a deeper probe.

Sector Variation (Y-o-Y)
In Outstanding credit
2009-10 2010-11
% %
Non-food Credit 16.8 20.6
Agriculture & Allied Activities 22.9 10.6
Industry (Micro & Small, Medium and Large ) 24.4 23.6
Micro & Small 22.1 11.0
Medium 8.6 39.2
Large 27.4 24.1
Services 12.5 23.9
Source: Reserve Bank of India May 2011, p626.

Let the Government, the owner of 85% of the banking system, look into the underperformance of Banks in Agricultural Credit and Priority Sector Advances and put in place more stringent disclosure and compliance norms. Let each Bank reveal their actual credit exposure to Agricultural Credit and Priority Sector Advances in their Financial Statements published in newspapers both in terms of number of farmers and enterprises covered and amount disbursed that should stand the rigid regulatory scrutiny. Punitive action for wrong classification should follow. In any case when do we monitor the flow instead of stock of credit to farm and MSE sectors?

*The author is an economist and Member, Expert Committee on Cooperative Banking, Government of AP. The views are personal.

Time for Restructuring State Ministry of Agriculture


It is heartening to listen to the CM Kiran Kumar Reddy at Bangalore on the State’s prospect of posting a 6.5 percent growth and the State’s economy to leapfrog to 9.5 percent. There is also a goal for the State to reach 300mn tones of food production by the end of the Twelfth Plan. The State needs such optimistic thinking and approach at this critical juncture. But when one looks at the serpentine queues of the farmers for the seeds of any crop right at the sowing time, poor management of the farm sector stares at us. This is not the first year that the State has this predicament. In the marketing season, farmers bemoan of lack of space to store, and nobody to deliver the price for their season’s hardship. We just witnessed in most market yards the paddy bags under sheets of water; not enough gunny bags to store; not even enough tarpaulins to store; no storage space in the existing godowns. Chilly farmers got their crop washed out in the untimely rains or burnt in well-designed cold storage warehouse disasters. The tenant farmers’ rejoice at their right for institutional credit through the recently announced ordinance hopefully results in the intended benefits – the only silver lining in this farm season, to site a good beginning. Why are all these happening for the last few decades? Why should farmers take to streets to fight for their basic production rights? Are there no remedies? Do these questions not beg of us to look at the fundamentals of administrative architecture of this most important sector on which 60 percent of the population still depends for their livelihood?

Like nowhere else in the world, farm and allied sectors are looked after by at least fourteen ministries and a host of organizations heavily bureaucratized: Ministry of Agriculture; Ministry of Animal Husbandry, Dairy Development, Fisheries; Ministry of Major and Medium Irrigation; Ministry of Cooperation; Ministry of Revenue, Relief and Rehabilitation; Ministry of Finance; Ministry of Food & Civil Supplies; Ministry of Marketing & Warehousing – at the State level and Ministry of Agriculture and Cooperation, Ministry of Food Processing; Ministry of Finance; Ministry of Forests & Environment; Ministry of Commerce and Trade; Ministry of Food and Civil Supplies at the Central Government level. There is State Planning Board and the Union Planning Commission at the helm to decide on many issues that concern all these ministries. Each Ministry has its regulatory strings to apply on the farmer because each is an empire unto itself and there is no coordination among them at the beginning of the agriculture season. Planning Commission long back seized to be a coordination agency. It is content with preparing grandiose plans and allocating limited resources through discussions at the National Development Council. Exigencies of politics predominate over economic necessities.

In Agrarian States like Andhra Pradesh, a beginning could be made in reorganizing the ministries to start with and bringing the departments of agriculture, horticulture and allied activities like animal husbandry, fisheries, that deal with production, cooperation, marketing and civil supplies that deal with distribution under single Minister who should have full comprehension and empathy for the farmers. The orgnisational structure could be as follows:

This would mean that the number of ministries at the State level would be reduced to one from the existing four. At the beginning of the season, all the above functionaries would have a meeting with all the functionaries in the chart for a day or two – even now the Commissioner of Agriculture is holding a coordination meeting with the NABARD, financing institutions and cooperative banks and his department officials at the beginning of Kharif and Rabi. These meetings are not transparent and monitorable in terms of the decisions taken and officials concerned are not accountable for any lapses or shortfalls. In the above coordination meeting, the Minister presiding and the Agriculture Production Commissioner who is of the rank of Additional Chief Secretary, is expected to be fully informed of all the links in the supply chain in production and value chain management in agriculture right up to the distribution end and would be in a position to format the decision making process depending upon the various issues that come up for discussion. The Minister can also invite the principal secretary (Energy) and Principal Secretary (Information Technology) for the half-yearly meetings to take into consideration the issues and facilitation that could come from them to the farmers during and off the season. Principal Secretary (Agriculture) should be the Member-secretary for this coordination panel. He would draft the minutes within the next twenty-four hours and arrange for issuance of appropriate instructions for all these line departments to follow implicitly and the concerned departmental heads would be squarely responsible for any and all lapses in implementing them. During the week that follows, the State Level Bankers’ Committee should be convened to cause the financial arrangements to be put in place. This mechanism would expand the burden of implementation on those who are actually responsible. Transparency, Accountability and Governance would significantly improve.

Whenever the disasters occur, emergency meeting shall be held to take collective decision for coordinated implementation at the field level through the District Collectors. The Minister for Revenue would coordinate with the Minister for Agriculture in situations of natural calamities and other disasters.

These measures would make a significant departure from each department pulling in different directions making the farmers cry loud both at the beginning and end of the season. The State would also have the pride of taking leadership once it ensures success of this model. The Rythu Chaitanya Yatras, Polam Badi, Atma, AIBP would automatically be integral to the whole effort and extension would be in a position to deliver results to the farmer. This would also help in reducing unnecessary expenditure in multiple delivery points in meaningless directions. Chief Minister Kiran Kumar Reddy, young and dynamic and sportive as he is, would be able to lap up electoral benefits from the largest voting constituency, viz., the farmers and could also win the hearts of the opposition. What matters, of course, is the courage to dispense with three Ministers!!

*The Author is an economist and Member, Expert Committee of Cooperative Banking, Govt of AP. The views are personal. Can be reached at