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The Union government is working on a Universal Enterprise ID system to help strengthen the credit ratings of small enterprises that serve as the engines of the Indian economy, an internal document showed.

Under the proposal, which may be announced in the Union budget, a group of MSMEs will form a special purpose vehicle (SPV) to borrow from banks under a single transaction and on-lend to its members.

Also, credit rating agencies are expected to come up with new models to assess the creditworthiness of MSMEs.

The enterprise ID was first proposed by an expert committee on micro, small and medium enterprises (MSMEs) led by former Sebi chairman U.K. Sinha in 2019 to enhance credit availability to these entities. India has about 63.39 million MSMEs, according to the 73rd round of the National Sample Survey (NSS).

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The government is also working to improve MSMEs’ market access by developing a digital business match-making platform to showcase and integrate them with national and international supply chains, according to the document reviewed by Mint.

“We can’t have the same credit norms for the corporate sector and the non-corporate sector. It is because of which the small businesses, part of the non-corporate sector, deserves a different credit rating based on basic fundamentals of the business module of the non-corporate sector," said Praveen Khandelwal, secretary-general of the Confederation of All India Traders.

The digital business match-making platform would also ensure the rise of small businesses, but to ensure its greater penetration, the government must take the stakeholders into confidence and make them partners in launching an awareness, adoption and acceptance drive among small businesses, Khandelwal added.

Highlighting the problems faced by the MSMEs in accessing working capital, the Federation of Indian Micro and Small and Medium Enterprises (FISMI) said that none of the SMEs, even the best-managed ones, get a BBB+ rating because of a fundamentally flawed rating model.

“While credit rating for listed companies is to ascertain return on investment/growth for retail equity holders or investors, the bank loan rating (BLR) rating, on the other hand, is to determine solvency for banks mostly for short-term working capital. However, the same model is applied to SMEs for BLR, making access to competitively priced finance nearly impossible for SMEs," FISMI said.

The Sinha committee had recommended making MSME rating products more relevant and predictive of credit performance, stating that rating agencies may be encouraged to build more 360-degree scoring models by taking into account newer data sources, including utility bills and tax payments, among others.

“The implementation of a Universal Enterprise ID will facilitate this market. To promote the growth of cash flow-based lending, rating agencies may need to develop newer offerings. Banks in their credit appraisal process must specify the workflow in the event that the MSME has a credit rating available to it," the committee had said in a report.

The Sinha committee report found that there is no common identifier through which an entity or enterprise can be recognized, referenced, and electronically verified, and enterprises “face problems when they approach other authorities for any permissions".

The panel sought to introduce enterprise ID using PAN on a mission-mode basis to ensure the availability of credit to MSMEs.

Queries emailed to the ministry of micro, small and medium enterprises and the finance ministry remained unanswered till press time.

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