Ensuring Fair Access To Finance: A Legal Critique Of Credit Rating Practices For Small And Medium Enterprises (SMEs)
Mirdula Varshni D, School of Law, SRM Institute of Science and Technology
ABSTRACT
Small and Medium Enterprises (SMEs) play a critical role in India’s economic development, yet they face persistent barriers to formal credit access. To have wide access to finance they approach Credit Rating Agencies to get their Enterprise level ratings to attract investors. A key structural obstacle lies in the credit rating methodologies employed by Credit Rating Agencies (CRAs) such as SMERA, CRISIL, ICRA & CARE. CRISIL evaluates small and medium enterprises using an eight-level rating system, where SME 1 reflects the strongest credit profile and SME 8 denotes the weakest. Agencies provide Credit Rating based on Financial Performance, Operational Efficiency, Management Capability, Industry Risk, Credit History, Customer and Vendor Longevity and Satisfaction and Regulatory Compliance. They rely more on collateral securities to assess the extent of risk involved in a SEBI and CRAs adopt regular parameters that more suitable for large, stable firms with better financial background, but these parameters are highly unfit for smaller, newer enterprises. Hence, SEBI should introduce SME-specific regulations to ensure fair assessment and better access to credit facilities. SMEs overcome the lower credit ratings, the CRAs can adopt SME’s specific rating methodologies tailored specifically for them like considering the credibility of the promotor, recognizing sector specific and regional realities, and examining order book position to anticipate future cash flows.
Keywords: Small and medium enterprises, credit rating agencies, Inaccurate or lower ratings.
