How to improve CIBIL MSME Rank?
When it comes to running a business or enterprise, funding is the most crucial aspect to fulfill various financial requirements, such as buying machineries, bearing regular expenditures, hiring staff, and more. In this scenario, loans can be a beneficial option to support the essential growth of your business. But, what if bank managers reject your loan applications due to a poor CMR rating? As a business owner, it’s essential to understand what a CMR rating is, why it plays a key role in evaluating business loan applications, and, ultimately, how you can improve CIBIL MSME Rank of your company for a smoother approval process.
In this article, we have covered each and every point, so let’s start the discussion with a basic understanding of CMR rating.
What is CMR rating?
We’re all familiar with the term “CIBIL Score,” which defines an individual borrower’s creditworthiness. Similarly, the CMR rating, especially designed by TransUnion CIBIL, evaluates the creditworthiness of commercial entities, such as micro, small, and medium-sized enterprises (MSMEs) with a credit exposure lesser than 10 Lakhs to 50 Crores.
CMR stands for “CIBIL MSME Rank” with a scale ranging between 1 to 10. Where a rank closer to 1 indicates a low-risk business, providing better chances of loan approval. On the other hand, CMR 10 refers to a high-risk business and acts as a red flag for lenders.
Practically, businesses with a CMR rank between 1 and 4 can secure business loans with favourable terms and conditions. Some private banks and NBFCs may also consider businesses with a CMR of 5 or 6. However, if your company CIBIL rank is above this range, then it will be very challenging to get any further loans.
Why is CIBIL MSME Rank so important?
CIBIL MSME Rank (CMR) acts as a credit default-predictor model and provides in-depth information about the credit profile and repayment behaviour of a commercial entity. When you apply for a business loan, typically, lenders access your Company CIBIL report and the CMR rating to evaluate whether you are capable of paying back the loan amount or not. It helps them to make more informed decisions about your company’s eligibility for the loan.
If your company has a good CMR rating, it allows you to negotiate with the lender for the best deal with a lower interest rate and repayment terms. In short, you can say, CMR rating has revolutionized the credit underwriting process and reduces the turn-around time (TAT) of loan approval.
What are the factors affecting CIBIL MSME Rank?
To improve CIBIL MSME Rank, first, you have to understand how TransUnion CIBIL calculates the rank for each commercial entity. There are some key parameters, such as
- Repayment Track: The most crucial aspect of CMR rating is repayment behaviour of a company toward their existing obligation TransUnion CIBIL typically maintains a repayment history for each credit line over the past 36 months. Any default or missed payment can result in the account being classified as an NPA (Non-Performing Asset), which significantly damages the CIBIL rank remarkably. Conversely, timely payments reflect the company’s responsible and disciplined approach to credit management, helps to enhance the MSME Rank accordingly.
- Liquidity Risk: The liquidity profile is determined based on the company’s credit utilization pattern over the past 24 months. Lenders typically set borrowing limits for revolving credit lines, such as cash credit and overdraft facilities. Overutilization, or using more than 75% of the available credit on such working capital loans, increases the risk of default and significantly impacts the CMR rating.
- Firmographics: It defines the company’s size, revenue, growth trends, credit exposure, and the vintage of its credit relationship with lenders. An established company with a long and substantial credit history is generally considered more credible and trustworthy than a new business, and impact the CMR rating positively.
- Credit Portfolio: A balanced mixture of different types of credit lines such as term loans, working capital loans, secured and unsecured business loans diversify a company’s credit portfolio and also affect CIBIL MSME Rank positively.
Ways to improve CIBIL MSME Rank:
Now, the main point of this article, if your company’s CMR rating is affected badly due to some reason, is there any possible way to get back your company’s credit rank? In such a scenario, you must take some immediate actions to improve CIBIL MSME Rank, so that you don’t have to miss the financial opportunities.
- Check your Commercial CIBIL report and rectify the errors (if any):
To improve your company’s CMR, first, you have to identify the faults. So, start the process by checking your Commercial Credit Report (CCR) thoroughly. For this purpose, you can purchase your Company CIBIL from the official site or arrange a copy of the CCR from the bank.
The data mentioned in your CCR should be correct and up-to-date. In case, you find your existing debt is not updated properly by the lender or any kind of unknown loan account overlaps in your company CIBIL report, then immediately rectify them by raising your concern to CIBIL authorities. If your CMR rating is effected by such errors, then after rectification, the rank will improve automatically.
- Pay off your pending due:
In the case of the CMR rating, a single missed payment can have a significant impact. When you default on your loan accounts, it leads to the reporting of overdue, delayed payments, and the status such as SMA, DBT, LSS, or even more severe negative remarks like “written-off,” “suit filed,” or “willful default” on your company CIBIL report. These negative remarks damage your CIBIL rank, and their effects can linger for a long time. If you have recently missed a payment on your current credit line, make sure to pay the full amount due immediately and update the payment information in your company CIBIL report accordingly. Once the account gets updated, it will help you to improve CIBIL MSME Rank of your company.
- Set a financial discipline:
Be punctual with your company’s existing obligations. Use a financial calendar or auto-debit options to ensure you never miss the loan due date. Manage your company’s expenses and cash flow efficiently to ensure funds are available for repayment.
- Maintain a Healthy Liquidity Profiles:
In most cases, customers complain that their CMR rating is high, even though they are paying their loan interest timely and never overlimit their working capital loan. On investigation, we often find that they are using their CC/OD balance of around 90% or more than that. Mostly, they are not even aware that such a high utilization also impacts their CMR rating.
Typically, when you max out your working capital loan, it reduces the company’s liquidity profile and consequently increases the value of CIBIL rank. So, always utilize your working capital loan optimally, less than 75% to maintain a good CMR rating.
- Diversify credit portfolio and build a strong firmographics profile:
A diverse credit portfolio demonstrates a strong and sustainable business, capable enough to handle various types of credit. Build a long and trusted association with your lenders and improve CIBIL MSME Rank accordingly.
Things to be avoided to maintain a good CIBIL MSME Rank:
- Always, try to close the credit facilities by paying off the entire loan balance rather than opting for settlement. Because a “settled” status in your commercial CIBIL report impacts your CIBIL MSME Rank negatively.
- Regularly monitor loans taken by other companies where your company acts as a guarantor. Any delinquency in these guarantor loans can also affect your CMR rating.
- Minimize hard credit enquiries in recent times and apply for a new loan only when you need it
