CIMSME Chamber of

Indian Micro Small & Medium Enterprises

[Link]

CIBIL MSME RANK (CMR)

A Big Hurdle or a Supportive Tool
in MSME Financing

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 01

Approved Functions by Credit Information Companies

Chapter V of The Credit Information Companies (Regulation) Act, 2005 deals with
the Functions of Credit Information Companies. According to Section 14 of the
Credit Information Companies (Regulation) Act, 2005, functions of a credit
information company are prescribed as under:

“(1) A credit information company may engage in any one or more of the following
forms of business, namely:—

(a) to collect, process and collate information on trade, credit and financial
standing of the borrowers of the credit institution which is a member of the credit
information company;

(b) to provide credit information to its specified users or to the specified users of
any other credit information company or to any other credit information company
being its member;

(c) to provide credit scoring to its specified users or specified users of any other
credit information company or to other credit information companies being its
members;

(d) to undertake research project;

(e) to undertake any other form of business which the Reserve Bank may, specify
by regulations as a form of business in which it is lawful for a credit information
company to engage.

(2) No credit information company shall engage in any form of business other than
those referred to in sub-section (1).

(3) Any credit information company for the purposes of carrying on the business of
credit information may-

(a) register credit institutions and other credit information companies, at their
option as its member, subject to such terms and conditions as may be
pre-determined and disclosed by such credit information company.
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 01

(b) charge such reasonable amount of fees, as it may deem appropriate not
exceeding the maximum fee, as may be specified under section 27, for furnishing
credit information to aspecified user.

It seems that while the Credit Information Companies are mandated to carry
out credit scoring,
they are not authorised to rank MSMEs within the ambit of Section 14 of the
Credit

(c) generally to do all such other acts and perform such other functions as are
necessary to facilitate proper conduct of its affairs, business and functions in
accordance with the provisions of this Act.”

It seems that while the Credit Information Companies are mandated to carry
out credit scoring, they are not authorised to rank MSMEs within the ambit of
Section 14 of the Credit Information Companies (Regulation) Act, 2005.

Conducting Credit Ranking/Rating is primarily a function of Credit Rating

Agencies which is done based on assessment of multiple parameters pertaining
to the rated entity. It appears that the CICs have self-assumed & over lapped
the role of MSME rating.

The research will try to find out whether the CIBIL MSME Rank or the MSME
Rank by other Credit Bureau is ultra virus or not.

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Confusion on Ranking and Rating

The CICs are assigning the MSME Rank which is very confusing as they are
ranking the MSME unilaterally and not in comparison to other MSMEs.

Ranking someone is listing something in order with other similar things based
on how all those units compare to each other (basically it is comparing one with
other and not judging it against itself).

Rating someone is giving it a number, or score, based on certain criteria

(basically it is judging it against itself, not comparing it to other).

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 03

Heavy Cost on MSMEs

As per details available on the website of TransUnion CIBIL, they charge a fee of Rs.
3,000 to Rs. 12,000 from MSMEs for the CMR reports under various schemes. It is
also important that the entire information on the basis of which the MSME rank is
assigned is being provided by
the members to the CIBIL absolutely free of cost.

Section 27 of The Credit Information Companies (Regulation) Act, 2005 is produce

below:

“Power of Reserve Bank to specify maximum amount of fees - The Reserve Bank
may, specify, by regulations the maximum amount of fees leviable under
sub-section (3) of section 14 for providing information to the specified users and
for admissions of credit institutions or credit information companies as a member
of a credit information company”.

Reserve Bank of India has also issued an advisory for all Credit Bureau companies
vide its notification number RBI/2013-14/[Link].127/20.16.056/2013-14
dated June 27, 2014.

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 04
Ranking of MSMEs based on multiple parameters
We have discussed with TransUnion CIBIL on the basis of the MSME Ranking by them. It is
informed to us that the MSME Ranking is done by them based on only the credit history of the
MSMEs, as they do not have any other data of the MSME.

This may be the bottleneck for the Credit Bureau companies of not having complete details on
the basis of which any MSME should be ranked. However, the MSMEs should not be penalised
for this limitation by Credit Bureau companies.

It is important to note that SIDBI has launched a FIT rank by leveraging the power of Goods
and Services Tax (GST), Bank Statements, and Income Tax Returns (ITR) information to provide
a ranking model for MSME lending. The ranking model uses machine learning algorithms to
arrive at the probability of an MSME becoming a non- performing asset (NPA) in the next 12
months based on its financial, income, and trade data. The ranking is done on a scale of 1 to 10
with FIT Rank 1 for the least risky MSME and FIT Rank 10 for the most atrisk MSME. Each FIT
rank corresponds to a Probability of Default (PD) and lower the FIT Rank, lower is the PD
associated with the MSME.

We feel that ranking of any enterprises should be based on multiple parameters, some of
which may be as below:

01. Promoters abilities and experience

02. Promoters Margin in the business
03. Sector of the business
04. Technology adopted by the company
05. Succession plan
06. Growth of the enterprises on YoY
07. Profitability margins
08. Various ratios like Debt : Equity, Current
Ratio, Liquidity Ratio, Profitability Ratio
09. Working capital holding period
10. Quality of customers and the diversified customers
11. Overall Governance & Compliance on statutory
requirements
12. Registrations and licences available
13. Ability and intention to repay the loans
14. Timely payment to the suppliers
15. GST Returns
16. Banking Transactions .. and many more

However, the credit information companies are ranking the MSMEs only on one parameter.

Further, Financial Institutions are making decisions solely based on the Rank given by the
Credit Information Companies, which is determined exclusively from the loan data provided by
the Financial Institutions.
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Information to the MSMEs about their Ranking

The MSMEs are not informed or notified while compiling their data by the Credit
Information Companies. Further MSMEs are also not communicated as and when
their ranking is downgraded/ upgraded. Most of the MSMEs are not aware about
any ranking by these credit information companies. Even if any MSME needs to
know their Rank, they need to pay hefty fee and the Rank report is supplied after
many days in many cases.

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The basis of Raking is not known/ informed to the MSMEs

The MSMEs are not informed the basis on which they are ranked on a scale of 1 to
10 by one company or A to M by another company. Many cases have been brought
to our notice where the MSME is ranked below the accepted rank even without
any default in repayment or very negligible delay of very negligible amount

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Sudden downgrading the Rank by multiple notches

In many cases the MSME Rank is sharply dropped straight from from 1-4 to 7-10
without anygradual notch by notch downgrade. Many cases have been brought to
our notice where the bankers have found the MSME Rank within the range of 1- 5
7.
andSudden downgrading
started processing of their the Rank
proposal. by multiple
However notches
by the time the proposal is
submitted to the sanctioning authority within a period of 10 to 60 days, the
bankers are stunned to see that the CMR Ranking of the MSME is owngraded by
multiple notches in the range of 7 to 10.

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Consent from MSMEs before ranking them

In case of Rating of any enterprise, the Rating Companies need to obtain the
consent of the enterprises. In case of MSME Ranking by Credit Information
Companies, there is no system of getting consent from the MSMEs.

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Difficult to get the corrections in CMR

While the MSMEs may get the shock of low ranking of their MSME being informed
by their lender or sudden downgrade of their ranking by multiple notches, it is
very time consuming and difficult job to get it corrected.
10. MSME Credit Ranking is Against the Principal of Natural Justice

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MSME Credit Ranking is Against the Principal of Natural Justice

There is another Rule of Nature Justice “Audi Alteram Partem” basically means
‘hear the other side’ which emphasizes that no person should be condemned
unheard.

This principle is grounded in the idea that a fair decision can only be reached when
all relevant information are considered. Failure to provide an opportunity for a fair
hearing can lead to a decision being declared null and void.

The Credit Information Companies are ranking the MSMEs on the basis of the data
provided by the Financial Institutions. There is no communication with the MSMEs
whose ranking is done by these Credit Information Companies. In the entire
process of Ranking the MSMEs are being unheard, which is ultra virus to the
Principle of Natural Justice.

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Different companies are providing different

MSME Ranking scales

There are different Credit Information Companies and are providing different
MSME Ranking. The basis of the parameters adopted by different companies may
be different, creating lot of confusion amongst MSMEs and the users of these
Ranks.

One company has named it CIBIL MSME RANK (CMR) and the scale is 1-10. The
othercompany has named it CRIF INDIA MSME RANK (CIMR) and the scale is A to M
(13 ranks). Hence, the scoring and ranking nomenclature needs to be standardised
for better uniform understanding and interpretation

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Raking is done for Micro and Small Enterprises only

MSMEs that have an exposure in the range of Rs. 10 Lakh to Rs. 50 Crore are
ranked under the CMR model. No such automated Ranking is done in case of
borrowers with more than 50 crores exposures without their consent. Thus this is
a hurdle only for Micro and Small Enterprises.

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No materiality concept in Credit Score and

Credit Ranking System
Many MSMEs and startups face challenges in accessing formal credit because of
No materiality
minor concept
historical defaults, inmay
which Credit
haveScore and
been due toCredit
financialRanking System
distress during
early-stage operations or other unforeseen circumstances including delay
payments from their customers. While credit rating agencies plays an important
role in determining creditworthiness, the current system of MSME Ranking by CICs
often fails to consider the materiality of such defaults in relation to the overall
credit profile of the entity or individual.

There need to be a materiality concept in MSME ranking systems, where only

significant defaults (those with a considerable financial impact or those that occur
frequently) should be factored into the credit score assessment. Smaller defaults,
which do not significantly affect the financial stability or credit behaviour of an
entity, should not disproportionately impact the credit score of individuals and
CMR of the enterprises.

This materiality concept should be designed both for the amount as well as
number of days. Default of less than 1% of the loan amount outstanding and/or
less than 10 days should not be factored while calculating the Credit Score and
Credit Rank.

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No Limitation Period as regards old defaults

There is no limitation clause in CMR Rank / Score reporting. The Score and rank
should be based only on the basis of track record of past three years. The
borrowers who have maintained a record of regular and timely payments over the
past 3 years should be able to get funding at the better terms. Defaults older than
this period should be excluded from the credit report history, provided that the
individual or organization has shown consistent responsibility in all financial
obligations during the past three years. This limitation clause will aims to
acknowledge that businesses and individuals who have demonstrated financial
discipline over a sustained period should not continue to suffer from the negative
impact of past defaults, may be due to any unforeseen reason.

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The Largest Public Sector Bank SBI do not consider

CIBIL MSME Rank (CMR)

As per information available with us, State Bank of India do not fetch
CIBIL MSME Rank while considering any MSME proposal for financial
decisions. They do their own Risk Rating. Should other lenders also fall in
line with State Bank of India, which perhaps has the most robust lending
system for MSME Lending.

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