CIBIL and CMR: How better credit ratings can help fuel growth for MSMEs

A guide to improving MSME credit ratings and access to better funding

Article at a glance: 

• A good CMR (between 4 and 1) can give MSMEs access to affordable credit

• Lenders use CMR to evaluate the credit-worthiness of finance seekers

• It is also possible for business owners to fund businesses in a personal capacity via CIBIL scores

You may have heard of the term credit rating or the CIBIL score, which banks use to evaluate the credit-worthiness of individual borrowers. Just as the CIBIL score is a rating of loan-takers, CMR (CIBIL MSME rank) is an assessment of the credit-worthiness of micro, small and medium enterprises (MSMEs). 

Understanding CIBIL MSME Rank (CMR) 

CMR assigns a grade to small and medium businesses based on their credit profile, repayment behaviour and future repayment capacity. A score towards the lower end of the scale shows greater credit-worthiness. Banks and non-banking financial companies (NBFCs) use CMR to evaluate loan applications from MSMEs. 

The CIBIL MSME Rank rates businesses on a scale of 1 to 10, with CMR-1 indicating minimum risk of default and CMR-10 indicating the highest risk. CMR is assigned only to companies that have an overall outstanding credit of Rs 10 lakh to Rs 50 crore.

Why is CMR important for an MSME? 

Banks and financial institutions are often wary of lending to MSMEs without collateral because they fear defaults. CMR is an objective model or criteria to assess the credit risk of an MSME. A low CMR indicates that an MSME has a good repayment track record and practices prudent credit behaviour. This helps lenders reduce their credit risk and extend finance to deserving applicants.

For MSMEs, a low CMR improves access to quick and affordable credit. Many leading banks offer a lower rate of interest to MSMEs with a low CMR.

How can you check your company's CMR? 

Follow the steps below to check your company’s CMR:

• Visit the website: https://www.cibil.com/online/Company-credit-report.do

• Fill in necessary details: name and address of the company, contact details of the company and applicant, PAN number etc

• Pay the registration fee (around INR 3000)

• CIBIL will mail you a unique Registration ID and Transaction ID. Use the registration ID to access the next steps

• Upload KYC documents

How do you improve your CMR? 

Improving CMR requires that a few measures are undertaken by businesses:

1. Bill payments need to be made on time - just as it would be in the case of individuals, any outstanding debt or credit card payments for businesses need to be paid consistently on time.
2. Lower credit utilisation - A safe bet as far as credit utilisation is concerned is to keep the ratio under 30%. Even if larger sums are available to the business, not actively seeking it will benefit your business. However, if you do take on more debt, pay it back on time. This will help your credit score recover in the long run.
3. Clear old debt first - Before taking on additional debt, clearing the original debt should be prioritised. Too many outstanding loans may scare off lenders.
4. Consider taking a short-term loan - After all your outstanding debt has been cleared, a short-term loan should be availed. If you repay this loan on time, it should help your credit score rise as it proves your capacity to repay the loan.
5. Safeguard old credit cards - Older credit cards and timely bill payments indicate stability and help you boost your credit score.
6. Report mistakes - Simple mistakes such as the wrong mobile number, or spelling errors could lower your score. By checking your reports periodically, you can help identify these errors and rectify your credit score.

Final note: Enhancing a credit score may seem easy, but doing so takes a significant amount of time. For businesses that have a reasonably strong score, enhancing it is a good idea. It provides quick access to funding, and lenders are often happy to part with funds at better terms For those that have a higher CMR, the road to better funding might seem long, but taking steps to remedy the situation is definitely worthwhile.