SME City

Rising Interest Rates will Choke SMEs

By SiliconIndia     
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Bangalore: Last year saw the Reserve Bank of India increasing the policy basis interest by 25 points, which was the 12th hike since 2010, according to a report on the Indian Express. This meant that institutions such as the National Small Industries Corporation (NSIC) had to pass the brunt of the burden to its customers, most of who were SMEs (Small and Medium Enterprises).
Indian SMEs currently account for 40 percent of exports from the country and yet one of the major business challenges faced by them is that of inadequate funds and assistance from the government in this regard. Crisil, the Credit Rating and Information Services of India Ltd. said SMEs were bound to get more affected by increases in interest rates, since larger enterprises are more capable of passing on price increases and negotiation for more suitable terms.
Ramraj Pai, the Director of Crisil's ratings threw some light on this scenario, saying "If SMEs can, in a rising interest rate scenario, be more conservative in their borrowing plans, that would mitigate the interest rate impact. The only caveat being that any enterprise will have to balance the requirements of business growth and funding in deciding its optimal funding mix."
Interestingly, Crisil's analysis showed that while SMEs as a whole were affected by the increase in interest rates, enterprises in the services sector were not as badly affected as those in the manufacturing or trading sectors, since they didnít borrow as much.
But even in the service sector, Dinesh Agarwal, founder and chief executive of IndiaMART InterMESH Ltd, a business-to-business marketplace, said that the rate on the company overdraft has risen from 10 to 13 percent within a time period of 18 months (spanning from mid-2009 to 2011).
In short, both availability and the cost of borrowings are major problems for SMEs. NSIC Chairman and Managing Director H.P Kumar said "Globally loans are available at 4-5 per cent. In India the SMEs have to pay around 15 per cent."

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