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Small and medium enterprises (SME) present banks with huge untapped business potential

A study on the financial profiles of SMEs, carried out by CRISIL, comparing the financials of 32,000 SMEs with over 2500 large corporates provides compelling evidence that there are a large number of creditworthy SMEs. For banks, the sector thus represents tremendous untapped business potential.

Crisil study 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 CRISIL, business success of so many SMEs, some of whom have gone on to make IPOs in recent months, points to the potential of this sector. For a lender, the capability to distinguish between strong and weak credits through credit ratings will be the key to successful participation in this sector’s growth.

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.

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