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.
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Industry Classification |
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(BDT in Million) |
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(BDT in Million) |
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Enterprise |
Fixed Assets (excluding land & factory buildings) |
Employees |
Turnover |
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Cottage |
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<1.00 |
Max. 15 |
N/A |
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Micro |
Mfg. |
1.00 – 7.50 |
01 – 25 |
N/A |
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Service |
<1.00 |
Max. 15 |
N/A |
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Trading |
Max. 1.50 |
Max. 10 |
Max. 20.00 |
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Small |
Mfg. |
7.50 – 150.00 |
26 – 120 |
N/A |
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Service |
1.00 – 20.00 |
16 – 50 |
N/A |
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Trading |
1.50 – 20.00 |
11 – 30 |
20.00 – 200.00 |
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Medium |
Mfg. |
150.00 – 500.00 |
121 – 300 (For RMG/labor intensive orgs. – max. 1,000) |
N/A |
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Service |
20.00 – 300.00 |
51 – 120 (For RMG/labor intensive orgs. – max. 1,000) |
N/A |
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Trading |
20.00 – 150.00 |
31 – 100 |
200.00 – 500.00 |
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Large |
Mfg. |
>500.00 |
>300 (For RMG/labor intensive orgs. - > 1,000) |
N/A |
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Service |
>300.00 |
>120 |
N/A |
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Trading |
>150.00 |
>100 |
>500.00 |
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The policy mentions that in cases where an activity meets criteria for multiple industry categories, it will be classified under the highest applicable category. For example, an activity that falls under the category of cottage industry based on one criterion may fall under the category of micro industry based on another criterion. In such a case, the activity will be considered as belonging to the micro industry category.
(BDT in Million)
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Maximum Loan Limit in Favor of CMSMEs |
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Loan Limit |
Cottage |
Micro |
Small |
Medium |
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Mfg. |
Mfg. |
Service |
Trading |
Mfg. |
Service |
Trading |
Mfg. |
Service |
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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:
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 (Debt to Equity Ratio, Total Debt Ratio, Equity Development Trend, Net Worth)
- Liquidity (Current Ratio, Quick Ratio, Cash Conversion Cycle)
- Profitability (Gross Margin, Operating Margin, Net Profit Margin, ROE, ROA)
- Coverage Position (Interest Coverage Position, Debt Service Coverage Ratio)
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 helps 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:
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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:
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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
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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. |
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