Small, medium firms eye overseas funds

Small- and medium-size companies, the worst hit by the sustained increase in interest rates over the last 14 months, are trying to tap the overseas markets for funds. A cross-section of such companies contacted by Business Standard said resources raised overseas would cost them nearly half of what they would pay the domestic banks.

"The companies that are able to hedge the foreign exchange risk are looking at the cheaper foreign currency loans," said a top executive of a foreign bank, who did not want to be named. For small and medium companies, interest rates vary from 12 to 18 per cent.

The big firms are also bearing the brunt of the rising interest rates. But the impact on them softer since their exposure to domestic loans, as percentage of overall debt, is smaller.

Interest rates have risen 300 basis points (1 basis point equals one-hundredth of a percentage point) since January last year. The changed attitude of banks has added to the burden. Most banks are charging interest rates on loans to companies at the prime lending rate (PLR) minus 1 percentage point, against PLR minus 3 percentage points in January 2006. Thus, the effective rise in rates has been 5 percentage points.

Cement companies, which are investing a total of Rs 30,000 crore to increase capacity by 75 million tonnes to 240 million tones, said the majority of the investments in the industry were coming through internal accruals. The rising interest rates therefore did not really hurt much. "The tight interest scenario is temporary and it should be easy soon. However, it will impact new investment plans if the rise in interest rates continues," said K C Birla, chief finance officer of UltraTech Cement, a part of the Aditya Vikram Birla group.

The textiles industry too appears unaffected. "Due to the Technology Upgradation Fund, the rising interest rates are not that pinching as much as they would have had the TUF not been there. The overall burden is low," said Sunil Khandelwal, the chief financial officer of Alok Industries.

The TUF scheme provides 5 per cent reimbursement on the interest charged by the lending agency. The cost of projects sanctioned under the scheme in the current financial year is about Rs 30,000 crore, twice what was sanctioned during 2005-06.

Shekhar Agarwal, the chairman of Confederation of Indian Textile Industry, said the sector had lined up investments worth Rs 1,40,000 crore in next five years.

Experts say there should be more avenues of financing available to small and medium enterprises. "Most of these companies don't have access to cheap money. Moves like the Bombay Stock Exchange's Indo-next (exchange for SMEs) could well change that by allowing a greater number of SMEs to list and access the capital and debt markets," said Varun Tuli, president, business banking, at Yes Bank.