SME Rating Methodology

1.0 Overview and Scope

This article named ‘SME Rating Methodology’ represents National Credit Ratings’ (NCR) methodology for rating Cottage, Micro, Small and Medium Enterprises (CMSME) in the field of manufacturing, service and trading. CMSMEs have been defined in the National Industrial Policy – 2022 of the Government of the Peoples Republic of Bangladesh. Bangladesh Bank has also guidelines regarding the maximum loan limit to each industry class. NCR recognizes the CMSMEs taking into account the loan limit approved by the banks and financial institutions and the division under which the facility or facilities is/are sanctioned as well. This methodology should therefore be considered during the rating of concerns that fall under such consideration irrespective of the ownership structure.

Industry Classification
Enterprise	Fixed Assets *(excluding land & factory buildings)*	Employees
Cottage	< TK 1.00 mil.	Max. 15
Micro (Manufacturing)	TK 1.00 mil. – TK 7.50 mil.	01 – 25
Micro (Service)	< TK 1.00 mil.	Max. 15
Small (Manufacturing)	TK 7.50 mil. – TK 150.00 mil.	26 – 120
Small (Service)	TK 1.00 mil. – TK 20.00 mil.	16 – 50
Medium (Manufacturing)	TK 150.00 mil. – TK 500.00 mil.	121 – 300 (For RMG/labor intensive orgs. – max. 1,000)
Medium (Service)	TK 20.00 mil. – TK 300.00 mil.	51 – 120 (For RMG/labor intensive orgs. – max. 1,000)
Large Industry (Manufacturing)	> TK 500.00 mil.	> 300 (For RMG/labor intensive orgs. - > 1,000)
Large Industry (Service)	> TK 300.00 mil.	> 120

(BDT in Million)

Maximum Loan Limit in Favor of CMSMEs
Loan Limit	Cottage	Micro			Small			Medium
Loan Limit	Mfg.	Mfg.	Service	Trading	Mfg.	Service	Trading	Mfg.	Service
Max. Loan Limit	1.50	10.00	2.50	5.00	200.00	50.00	50.00	750.00	500.00

2.0 Framework

While rating CMSMEs, NCR considers both quantitative and qualitative risk parameters of the concern under different broad categories as per the guidelines of Bangladesh Bank. The broad categories are as follows:

SME FRAMEWORK

2.1 Financial Risk

Credit risk of a business from the lenders’ perspective is the ultimate concern during the rating. Use of leverage in CMSMEs should be dealt with proper scrutiny. Credit risk, character, capital structure and conditions are analyzed in assessing financial risks. Factors considered during financial risk analysis are:

Leverage
Liquidity
Profitability
Coverage Position
Gross Margin
Operating Margin
Return on Assets (ROA)
Return of Equity (ROE)
Equity Development Trend
Trend of Operating Cashflow (OCF)
Business and Personal Net Worth

2.2 Business / Industry Risk

Concerns having similar primary business activities are grouped into an industry. Individual concerns can hardly differentiate themselves from the overall industry characteristics. Thus, proper understanding of the different traits of the industries help understanding the environment in which a business is operating. Moreover, creditworthiness of a concern largely depends on the business risks associated with the concern. Following factors are considered during business and industry risk analysis:

Size of Business
Age of Business
Business Outlook
Business Growth Compared to Industry
Bargaining Power of Buyers
Bargaining Power of Suppliers
Rivalry Among Existing Competitors
Threat of new entrants
Threat of substitutes
Level of Technology
Infrastructure Facility
Government Policy toward the Industry
Potentialities and Social Desirability of Products
Trade Mark / Patent / Copy Right etc.
Franchise / Dealership
Marketing Strategy

2.3 Management Risk

Many of the financial and business risk factors depend on the management of the company. Proper management can substantially reduce those risks. To analyze the management risks of a concern, NCR considers the following factors:

Track Record of the Sponsors
Educational Qualification of Sponsors/Staffs
Experience and Technical Know-How of Sponsors/Staffs
Risk Taking Capacity of Sponsors
Personnel Policy and Internal Control System
Succession
Working Environment / Team Work
Income Tax / VAT Payment History

2.4 Bank Relationship Risk

To assess the willingness and ability of the SMEs to meet its obligations, it is quite important to scrutinize the banking relationships that enterprises maintain. Banking relationship of SMEs can be portrayed through analyzing statements and account transaction behavior. NCRL focuses on the following factors to evaluate bank relationship risk:

Relationship with Bank
Current Status of Loan
Compliance of Covenants/Conditions
Personal Deposit

2.5 Financial Security Risk

Security and collaterals are important in assessing the recovery prospect. NCRL considers the following factors:

Security Coverage
Collateral Coverage
Support or Guarantee
Legal Intervention Regarding Security Coverage

2.6 Other Factors

Some other factors considered during the rating process are listed below:

Legal / Environmental Issue/Compliance
Disaster Management Capacity
Insurance Coverage
Govt. Subsidies / Tax Waiver
Any other Material Risk Factor

Disclaimer:

The Methodology is developed by National Credit Ratings Limited (NCRL) based on data/information from secondary reliable sources which is in compliance with the guidelines provided by Bangladesh Securities and Exchange Commission and Bangladesh Bank. NCRL puts best efforts to prepare this document. The methodology may inherit human error, technical and/or systematic error as its limitation. Therefore, NCRL does not provide warranty of any kind for this document. This is the property of NCRL and is only used for rating of corporate issues. None of the information in this document can be copied or otherwise reproduced, stored or disseminated in whole or in part in any form or by any means whatsoever by any person without written consent of NCRL.

For further details please contact:

National Credit Ratings Ltd.

Zaman Tower (8^th Floor)

37/2, Box Culvert Road, Purana Paltan

Dhaka-1000

Tel: +88-02-47120156-58

e-mail: ncrlbd10@yahoo.com

website: www.ncrbd.com

SME Rating Methodology

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