For a small business owner in Bangladesh, getting a bank loan can be difficult even when the business is doing reasonably well.
A manufacturer may have regular orders but need money to buy raw materials. A wholesaler may have a reliable network of customers but lack the collateral a bank demands. A business may have been operating for years, generating steady sales, yet struggle to convince a lender that it can repay a loan.
From the bank's perspective, the concern is understandable. Lending without enough information about a borrower carries risks. But for the business owner, the inability to prove creditworthiness can mean missing an opportunity to expand.
This is where credit ratings could make a difference.
While credit ratings are commonly associated with large corporations, banks and financial institutions, the same principle could be useful for smaller businesses. A reliable assessment of an enterprise's financial health, management and ability to repay debt could help lenders look beyond collateral and make more informed decisions.
The question is whether such assessments can work for businesses that often have limited documentation and cannot afford the same professional services as larger companies.
Looking beyond collateral
One of the difficulties in SME financing is that banks do not always have a complete picture of the businesses approaching them.
Large companies are more likely to maintain audited financial statements, formal accounting systems and detailed records of their operations. Smaller enterprises, particularly those operating informally, may not have the same level of documentation.
Some businesses keep incomplete accounts or rely heavily on cash transactions. Others have limited borrowing histories, making it difficult for lenders to judge how they might behave when given access to credit.
This information gap can influence lending decisions. When a bank cannot confidently assess a business, it may ask for additional collateral, offer a smaller loan or reject the application altogether.
A credit rating could help address part of this problem by bringing different aspects of a business together in a structured assessment. Alongside financial performance, a rating may consider management quality, business prospects, operational capacity, industry risks and the enterprise's ability to generate cash.
These factors matter because a business's creditworthiness cannot always be judged by the assets it owns.
A small manufacturer might not own its factory premises but could have regular orders, dependable buyers and a healthy cash flow. Another business might own valuable property but be struggling with declining sales and mounting debt.
A more comprehensive assessment could help lenders distinguish between the two.
It would not mean that a business with a favourable rating should automatically receive a loan. Banks would still need to examine the purpose of borrowing, repayment capacity and other risks. But a rating could give them a stronger basis for deciding which borrowers deserve a closer look.
Can ratings change how banks lend?
For credit ratings to make a real difference, banks must be willing to use them in their lending decisions.
If an SME obtains a rating but the bank continues to rely almost entirely on collateral, the assessment may do little to improve access to finance. The business would have paid for information that has not meaningfully changed its position.
The potential value lies in helping lenders assess risk more accurately. If a business can demonstrate a reliable repayment capacity, a bank may be better placed to determine an appropriate loan size, repayment schedule and pricing.
This could be particularly relevant for enterprises that need working capital to fulfil orders, purchase inventory or manage seasonal fluctuations in sales.
Credit ratings could also complement existing efforts to widen SME financing. Bangladesh Bank has introduced credit guarantee arrangements to help eligible smaller enterprises obtain institutional loans despite collateral constraints.
The two approaches address different parts of the problem. A credit guarantee can protect a lender against a portion of its potential loss, subject to the scheme's conditions, while a credit rating can help assess the borrower's underlying creditworthiness.
Used together, they could make it easier for lenders to consider businesses that might otherwise struggle to qualify for conventional financing.
However, ratings alone will not persuade banks to take risks they are unwilling or unable to take. Their effectiveness will depend on how lending policies, risk assessment systems and guarantee arrangements work in practice.
The question of cost
There is another issue that cannot be overlooked: getting a credit rating costs money.
For a large company seeking substantial financing, the expense may be relatively small compared with the potential benefits. For a small business looking for a modest loan, the calculation can be very different.
The Credit Rating Agency of Bangladesh (CRAB), for example, has published a fee schedule for rating SME exposures to banks and financial institutions, with charges ranging from Tk 4,000 to Tk 1 lakh, inclusive of VAT, depending on the exposure bracket. Its published schedule covers exposures from Tk 30 lakh to above Tk 100 crore.
Even when the fee itself is manageable, a business may need to spend additional time and money organising accounts, preparing documents and meeting the requirements of the assessment.
For an enterprise seeking several crore taka to expand production, that investment might make sense if the rating helps it secure financing. For a smaller business seeking only a few lakh taka, the cost could outweigh the likely benefit, particularly if there is no guarantee that the bank will recognise the assessment.
This is why requiring every SME to obtain an external rating would be difficult to justify.
A more practical approach would be to match the level of assessment to the size and complexity of the loan. Smaller borrowing requirements could be assessed through simpler scoring systems using verified bank transactions, repayment records and basic business information. More detailed ratings could be useful for enterprises seeking larger loans or financing from multiple institutions.
Banks could also commission assessments where they believe the information would improve their lending decisions. For eligible smaller businesses, subsidised ratings or shared assessment facilities could help reduce the upfront cost.
Ultimately, the aim should be to make credit assessment more accessible, not to introduce another expense that small businesses must bear before they can borrow.
The problem of missing data
Even an affordable rating will have limited value if the information behind it is unreliable.
Many smaller businesses in Bangladesh do not maintain detailed financial records. Some have little formal borrowing history, while others conduct a substantial share of their transactions in cash. This makes it harder to assess their actual financial position.
The problem also raises a question of fairness. A business with sound operations but poor documentation could receive a weaker assessment than a better-documented enterprise, even if its commercial prospects are stronger.
Improving bookkeeping and financial reporting among SMEs would therefore be an important part of the solution.
Digital transactions could help. With appropriate consent, verified bank statements, mobile financial service transactions, sales records and repayment histories could give assessors a clearer picture of how a business operates. Alternative data may be particularly useful for retailers and service providers that generate regular transactions but lack sophisticated accounting systems.
Still, such information must be interpreted carefully. A business's income may vary by season, and a temporary fall in sales does not necessarily indicate a long-term problem. Assessment methods must also account for differences between industries rather than treating every enterprise in the same way.
Banks and rating agencies will need to ensure that their assessments are based on reliable information and that businesses can correct errors in their records.