Banking Article, Banking Finance 2020, Banking Finance July 2020

CIBIL MSME Rank-An Additional due diligence Tool

CIBIL MSME Rank is a tool to Access the Credit Risk ranking of Micro, Small and Medium Enterprises to make informed lending decisions, CMR is a credit risk for MSMEs that predicts the probability of an MSME becoming NPA in the next 12 months. It helps us to understand the credit behaviour of MSME as well as the probability of default based on the rank. It is applicable to MSMEs with aggregate commercial borrowing between Rs 10 lakhs to Rs 10 Crores.CMR provides a rank to the MSME based on its credit history data on a scale of 1 to 10.CMR 1 being the best possible rank for the least risky MSMEs and CMR 10 being the riskiest rank for MSMEs.The lower the CMR, the lower the Risk of NPA associated with the MSME.

The Key Parameters used in CMR to measure credit risk are:

  1. Liquidity-the liquidity profile of borrower is adjudged by looking at the seasonally adjusted patterns of funds utilization over the past 24 month’s period.
  2. Firmographics-descriptive attributes like the maturity of the entity, ownership type, industry, location.
  3. Repayment Behaviour-month on month analysis of payments made along with the assets classification, are considered to determine if the borrower has a poor or a good track record.

The Model categorises the Entity into broadly three categories:

a) CMR-1 to CMR-3-Never delinquent or No Amount overdue.

b) CMR-4 to CMR-7-Are delinquent but never an NPA

c) CMR-8 to CMR-10-are known to be NPA at some point in time in the past 24 months.

CIBIL MSME Rank Meaning Description
CMR-1 Lowest Risk of Default Borrowers in this rank are expected to have the highest likelihood/probability to service their credit obligations on time .Such borrowers carry lowest credit risk.
CMR-2 Very Low Risk of Default Borrowers in this rank are expected to have t very high likelihood/probability to service their credit obligations on time .Such borrowers carry lowest credit risk
CMR-3 Low Risk of Default Borrowers in this Rank are expected to have high likelihood /probability to service their credit obligations on time. Such borrowers carry low credit Risk.
CMR-4 Significantly lower than the average default Borrowers are expected to have much better ability to service credit obligations then the average borrower. Such borrowers carry much lower than the average credit risks.
CMR-5 Marginally lower than average likelihood of default Borrowers in this rank are expected to be marginally better than the average ability to service their credit obligations in a timely manner .Such borrowers have marginally better than average credit risk.
CMR-6 Average Likelihood of default Borrowers in this rank are expected to have average safety regarding timely servicing of credit obligations. Such borrowers carry average credit risk.
CMR-7 Higher than average likelihood of default Borrowers in this rank are expected to have higher risk in servicing  in their debt obligations then average borrower .Borrowers are considered to have higher then average credit risk.
CMR-8 High Likelihood of Default Borrowers have defaulted or been delinquent in past and have very high likelihood to be in default status.
CMR-9 Very High Likelihood  of default or imminent default Borrowers have defaulted or been delinquent in past and have very high likelihood to be in default status.
CMR-10 Highest Likelihood of default or in default. Past defaulters and have highest likelihood to continue in default status.

Important points:

  1. Borrowers with CMR rating up to CMR-3 should be given preference for faster disposal
  2. For CMR 4/5, need based facilities may be approved.
  3. For CMR 6/7, Proper justification for the sanction /enhancement should be given. Credit Risk mitigants like additional collateral, guarantee etc.may be stipulated.
  4. For CMR of 8/9/10 may not be consider in case of new proposal while in case of existing accounts, enhancement may be done if reason is justifiable .Credit Risk mitigants like additional collateral, guarantee etc.may be stipulated.
  5. Borrowers without ‘’CIBIL MSME Rank’’ proposal to be considered as per extent guidelines. If borrower has availed any credit facilities and then no ‘CIBIL MSME Rank’ is coming then reasons for this to be ascertained.

Present CMR distribution of MSME Portfolio

If We will see the data of MSME In Non-Npa Portfolio 39% companies lies in CMR 1, 2 & 3 category where the scope of finance in already available while in CMR 4 & 5 percentage is 33% & others are in CMR 6, 7, 8 & 9 category.

We may see there is a huge opportunity not only for lending but also customer can be guided to improve their rating by maintaining  Financial discipline as well as to they must aware about the technical reasons for lower ratings .It will help Banks as well as customer to minimise the risk and get better pricing. There are already 69% MSME borrower they can have easy access to credit.

With the help of CMR Rating it is a game changer in doing the due diligence as it was very difficult to do this because it is largely very unorganised sector.

Benefits of CIBIL CMR

1.The new product is statistically built behavioural scorecard for MSMEs to predict default in next 12 months. CMRs are compliant with Basel norms  and will help in overcoming some of the key challenges in MSME lending like delayed  submission/Quality of financial statements ,subjectivity of credit decisions etc.

2. Generation of CIBIL report is an integral part of due diligence process and CMR will be an additional parameter in that report itself, However generation of that report ranks needs to be opted while generating the CIBIL Commercial credit report .Every CMR grade has a validated pd estimate associated with it which can help bank to offer risk based pricing to MSME units.

3. CMRs can facilitate continuous and timely surveillance of MSMEs which is otherwise difficult for lenders

4. Renewal of existing accounts, these CMRs can act as a monitoring tool to judge their financial performance.

‘’CIBIL MSME Rank will be very helpful tool for credit decision as   collection of information is very difficult for MSME sector which is largely unorganised. This will help Banks in acquisition of new MSME customers as well as to reduce turnaround time in disposal of proposal. It will also provide greater credit opportunities for deserving small businesses finally CIBIL MSME rank will help lenders to take quality credit decisions, improve Turnaround time, Control NPA and provide access to faster and cheaper credit. ‘’

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