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National Credit Ratings Ltd

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. NCR defines CMSMEs as per the definition of Bangladesh Bank in light of the National Industrial Policy – 2016 of the Government of the Peoples Republic of Bangladesh. This methodology should therefore be considered during the rating of concerns that fall under the definition of CMSME irrespective of the ownership structure.



2.0    Framework

While rating CMSMEs, NCR considers both quantitative and qualitative factors of the concerns as per the guidelines of Bangladesh Bank. Qualitative factors bear 60% weight while quantitative factors bear 40% weight. Framework for rating the CMSMEs is as follows:







2.1      Industry Risk Analysis

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. Following factors are considered during industry risk analysis:



  • Growth rate of the industry
  • Degree of government support
  • Cyclicality of the industry
  • Seasonality of the industry
  • Bargaining power of buyers
  • Bargaining power of suppliers
  • Rivalry among existing competitors
  • Threat of new entrants
  • Threat of substitutes



2.2      Business Risk Analysis

Creditworthiness of a concern largely depends on the business risks associated with the concern. To analyze the business risks of a concern, NCR considers the following factors:



  • Nature and type of the business
  • Ownership structure of the business
  • Qualification and experience of the promoters
  • Succession plan
  • Geographical location
  • Ownership status of the business premises (business center/showroom/warehouse/factory)
  • Support of other business / involvement of promoters with other businesses
  • Relationship with the buyers and suppliers
  • Volume of the business
  • Liquidity and profitability of the business
  • Asset management quality
  • Project risk analysis (value of completed and ongoing projects or work orders)
  • Future outlook of the business



2.3      Operational Risk Analysis

Operational risk arises from the internal practices, policies, processes and systems of a business. Factors considered in analyzing operational risks are as follows:



  • Physical infrastructure of the business
  • Compliance with regulatory and legal requirements
  • Quality of management
  • Number of employees and workers
  • Record keeping process and financial reporting system
  • Uses of technology and ability to cope up with the changing technological environment



2.4      Financial Risk Analysis

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:



  • Coverage position
  • Financial structure
  • Debt capacity of the business and the promoters
  • Utilization of capacity
  • History of classification status
  • Payment behavior of the concern and the promoters
  • Length of relationship between the concern and Banks or NBFIs
  • Compliance of covenants
  • Security arrangements against loan
  • Loan coverage through different form of securities



2.5      Other Factors

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



  • Income tax payment of the business and the promoters
  • Insurance coverage
  • Audit status of financial statements








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 (8th Floor)

37/2, Box Culvert Road, Purana Paltan


Tel: +88-02-47120156-58





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