CIBIL Rank & Company Credit Report: Transforming access to credit for MSME business owners

In the past few months, the overall credit deployed to the Indian micro, small, and medium enterprises (MSME) sector has seen a gradual recovery from pandemic levels, with over Rs 17.63 lakh crore deployed in April 2022, up from Rs 16.17 lakh crore deployed in March 2022. A slew of factors such as the government’s various policy interventions – including the Credit Line Guarantee Scheme (ECLGS) upto March 2023 and expansion of its guarantee from Rs 50,000 crore to a total cover of Rs 5 lakh crore – along with digitization have contributed to this growth.

And yet, despite these signs of a gradual recovery in credit extended to MSMEs, the Indian MSME sector – which contributes around 30% of India’s GDP and generates close to 11.10 crore jobs – faces various challenges when it comes to securing financing. Indian micro and small enterprises, in particular, face even greater challenges in availing access to credit due to lack of financial awareness, poor credit history, and inadequate financial management systems.

TransUnion CIBIL is leading various initiatives within the sector to create greater credit awareness amongst MSMEs and empower them with information about their credit profile throughCIBIL Rank & Company Credit Report. It is a record of a company’s credit history and a measure of its loan eligibility and may help them access credit faster and at more affordable rates.

“The Indian MSME sector is the backbone of the Indian economy and has the potential to help realize the Indian government’s vision of making India a $5 trillion economy by 2025,” said Sujata Ahlawat, Senior Vice President and Head of the Direct to Consumer (DTC) Interactive division at TransUnion CIBIL.

“However, the fact remains that when it comes to securing financing, a key enabler of growth, only one-third of Indian MSMEs are served through the formal credit ecosystem. That’s why, at Transunion CIBIL, we’re committed to improving the credit penetration in the Indian MSME sector by enabling MSMEs with credit education.” Ahlawat added.

CIBIL Rank and Company Credit Report (CCR)
CIBIL Rank and CCR provides lenders with insights regarding MSMEs’ credit behaviour to help lenders evaluate the business more objectively. These factors in turn may lead to lower interest rates and faster loan approvals for MSMEs with good credit history and CIBIL Rank. Often lenders offer preferential rates of interest for MSMEs with a CIBIL Rank between 4 to 1. With these reduced rates of interest, MSMEs can reap long-term rewards and grow their cash reserves. The closer an MSME ranks to 1, the better its chances may be to securing a loan.

Credit history is one of the determining factors for financial institutions when lending money to MSMEs. Company Credit Report (CCR) is a record of a company’s credit history and is created from data submitted to CIBIL by lending institutions across India. CIBIL Rank summarizes a business’s credit history based on the data in the commercial credit report. CIBIL Rank assigns a rank to MSMEs based on their credit history, on a scale of 10 to 1, where 1 is the best rank.

CIBIL Rank helps facilitate faster decisions from lenders as it helps lenders make more informed decisions by helping them evaluate the businesses in a more effective and consistent manner and thereby, accelerating the process of loan approvals for MSMEs.

As a matter of fact, majority of businesses who have secured loans in the past few years have had a CIBIL Rank between 4 to 1. This then raises another question, ‘how can one maintain a CIBIL Rank between 4 to 1?”

3 Effective ways MSMEs can build their CIBIL Rank
Here are three effective ways in which MSME business owners can achieve and maintain a high CIBIL Rank (between 4 to 1) for their businesses and improve their credit worthiness

• Ensure timely payments; avoid defaulting: It is essential for MSME owners to ensure that they make timely payments to all creditors within the agreed period as lenders have to report the borrowing business’s repayment patterns back to TransUnion CIBIL. MSME business owners must avoid defaulting on payments as it reflects negatively on their CIBIL Rank, whereas timely payments will help build a better CIBIL Rank.
• Apply for credit carefully: MSMEs should always remember to apply for only as much as their business needs, and as much as they can safely repay. This will help them avoid getting stuck in a debt trap. Also, it’s advised that MSMEs look at the formal lending landscape when applying for credit. Often in their bid for faster and easier access to loans, MSME owners resort to alternative lending solutions with higher interest rates and collaterals as guarantees. Lenders in the formal credit space are more likely to make better loan offers depending on the business's credit history and repayment capability.
• Regularly checking CIBIL Rank and CCR: It is essential for MSMEs to regularly check their CIBIL Rank and CCR as it is a reflection of their financial health and repayment capability. Constant monitoring of this report will help them track their credit worthiness and identify inaccuracies, if any, like fraudulent transactions and misuse of business-related information.

Factors that influence CIBIL Rank
There are a range of parameters that influence a business’s CIBIL Rank & CCR such loan repayment behavior - timely payments, any defaults, amount overdue; liquidity profile – rate of utilization of funds, missed payments; and new credit lines opened and the number of credit lines used in the past.

CIBIL Rank: ensuring loan-readiness for MSMEs
For MSMEs to ensure loan-readiness, it is critical that they understand the importance of maintaining a strong CIBIL Rank, as the ranking system acts as a reputation collateral, giving lending institutions and banks the confidence to provide fast and affordable credit to MSMEs.

In conclusion, as we continue to see gradual signs of a recovery in overall credit extended to MSMEs, it will be imperative for MSMEs to have sound financial foundation as well as build and maintain a strong credit history and a robust CIBIL Rank, so that they can be better positioned to gain access to more cost-effective credit, faster.