SMEs present strong financial profile: CRISIL
17 May 2006
India's first-ever study on the financial profiles of SMEs, carried out by CRISIL, highlights the strong financial fundamentals of SMEs in India. The study, comparing the financials of 32,000 SMEs with over 2,500 large corporates, reveals that 50 per cent of SMEs have debt-equity ratios of less than 0.34, and interest cover of over 2.24 times.
This is contrasted with large companies, where the respective debt-equity and interest cover levels are 0.73 and 2.63 times. CRISIL believes that a reason for the low level of indebtedness could be the non-availability of financing at attractive rates, due to a misplaced perception of high credit risk in the SME sector. Moreover, there is wide variation in financial profiles between the top half and the bottom quartile of SMEs; therefore, financially strong SMEs can benefit greatly by proving their superior creditworthiness through ratings.
According to Roopa Kudva, executive director and chief rating officer, CRISIL, "This is the largest such comparative study conducted in the Indian context, and the results are an eye-opener. The study provides compelling evidence that there are a large number of creditworthy SMEs. For banks, the sector thus represents tremendous untapped business potential."
The study also reveals that SMEs report weaker profitability than large corporates. The operating margin (profit before interest, depreciation and tax / operating income) for the average SME was 8.7 per cent, as against 15.6 per cent for the average large corporate. However, much lower debt-equity levels offset the lower profitability.
Moreover, the study finds that financial and credit parameters drop sharply for the bottom 25 per cent of SMEs. For instance, the interest coverage for the bottom 25 per cent of SMEs was 0.73 times, much lower than the corresponding figure of 1.28 times for the bottom 25 per cent of large corporates. Given the wide variation in financial strength across SMEs, CRISIL believes that reliable and robust measures of credit quality, fine-tuned to the sector's requirements, are essential tools for lenders to the sector.
Says D Thyagarajan, director, SME Ratings, CRISIL "The findings of this study are corroborated by CRISIL's experience with SMEs. The business success of so many SMEs, some of whom have gone on to make IPOs in recent months, points to the potential of this