The latest round of interest rate hikes by banks has hurt the profitability and competitiveness of micro, small and medium enterprises (MSMEs) by increasing the cost of credit. The move was triggered by the increase in repo and reverse repo rates by the Reserve Bank of India (RBI) on January 25.
“The government wants to cool down the economy by bringing down credit off-take, but by doing so, it is eroding our competitiveness in the international market. Almost all public and private sector banks have hiked their interest rates after RBI’s key rate hike. This is affecting our profitability as well,” said Ashok Patel, former president, Federation of Gujarat Industries (FGI).
Reserve Bank of India had raised the repo and reverse repo rates by 25 basis points each. The repo rate, the one at which RBI lends to banks is now 6.50 per cent, while the reverse repo rate, the rate banks get for depositing funds with RBI, stands at 5.50 per cent. In 2010, RBI had raised the key rates six times by 25 basis points each.
Gujarat houses significant numbers of MSMEs in sectors like engineering, chemicals, pharmaceuticals, plastics, ceramics and food processing. “We have around 950 SMEs in dyes and dyestuff operations alone. All of them are facing margin pressures due to increased interest rates. There has been an average two per cent hike in interest rate over the past six months, which small units find difficult to bear,” said Shankarlal Patel, president, Gujarat Dyestuff Manufacturers’ Association (GDMA).
“There is ample opportunity for MSMEs in Gujarat. But at the same time, industry needs to move cautiously ahead, as factors like inflation, interest rates and reduction in competitiveness may limit their profitability compared to what was visualised at the time of signing the MoU,” cautioned P K Modi of PKM Advisors, a financial advisory firm in Ahmedabad.
Banks do not see much pressure on micro and small units. But medium units with a turnover of over Rs 5 crore may feel the pinch due to the rate hikes. “MSMEs are our priority. Micro units are almost exempted from the pass-on effect of the rate hike. Small units may feel a little impact due to increased interest rates. They need not worry as of now,” said a senior official of Bank of India in Ahmedabad.
Industry players said the situation was becoming more difficult, as raw material and transportation costs had increased sharply over the past several months. “The situation is unfavourable for new units. Many existing units may avoid expansion due to high interest costs,” added Ashok Patel.