Will SMEs see improved credit ratings in 2018?

It has been a turbulent calendar year for small and medium enterprises (SMEs). They spent the initial months coping with the after-effects of demonetisation, and as that pain was receding, the goods and services tax (GST) was implemented in July.

Increased tax compliance led to a spike in their working capital requirements. This was a key challenge, especially for SME exporters, who had to first pay integrated GST, or IGST, and seek refunds after the goods were exported. Apart from that, technology glitches while filing GST returns on a monthly basis led to delayed tax refunds.

SMEs operating in sectors such as textiles, logistics and leather products, where the unorganized sector plays a key role and has key employers, were hurt the most.

It was only in October that the GST Council tweaked rules, allowing SMEs with an annual turnover of less than Rs1.5 crore to file GST returns on a quarterly basis. Also, the annual turnover limit under the composition scheme, which enables smaller firms to pay tax at a concessional rate, was raised from Rs75 lakh to Rs1.5 crore.

Meanwhile, a slowdown in demand and temporary business disruption caused by a complicated GST compliance process weighed on credit ratings of SMEs.

During April-November 2017, Care Ratings Ltd reviewed the ratings of 1,027 SMEs, upgrading 115 and downgrading 128 in this span of eight months.

After demonetisation, during the six-month period from November 2016 to April 2017, the ratings agency had upgraded 165 SMEs and downgraded 185, out of the total rating reviews of 1,721 SMEs undertaken in that period.

“The rating upgrade to downgrade ratio stands at 0.99 times, thereby reflecting higher number of downgrades as compared to upgrades. Similarly, the ratio of rating upgrade to downgrade was 0.99 times during FY17 (April 2016 to March 2017). Thus, up to November 2017, the upgrade-downgrade ratio has remained similar to that of FY17,” said Yogesh Shah, business head, Care Ratings Ltd.

According to R. Vasudevan, business head at Crisil SME Ratings, “Majority of players (Crisil-rated SMEs) are expecting improved performance during the second half of fiscal 2018 compared to first half.”

“Looking beyond the short-term implementation challenges, GST is expected to be more beneficial to SMEs which have sizable presence in small cities. Also, implementation of GST has led to increase in transparency in SMEs’ financial transactions. Such transaction trails will act as proxy to creditworthiness analysis matrices,” added Vasudevan.

To conclude, while the aforementioned relaxations have been provided to SMEs, complete clarity on whether these measures have been beneficial or not shall emerge only after some time. This means the risk of credit downgrades cannot be completely ruled out for SMEs.