The moderation in bank lending to small and medium enterprises (SMEs) due to a liquidity squeeze has forced them to opt for promoters’ money and personal loans to meet funding needs, according to rating agency CRISIL.
A study of 3,000 units on their working capital funding pattern revealed that many had sought to tackle mounting inflationary pressure with funds from their own sources. About 53 per cent of the total funding needs were met through promoters’ own funds and personal loans.
Availability of bank finances deteriorated in 2010-11, due to continuous increase in the cash reserve ratio (CRR), which absorbed liquidity from the sector. This compelled SMEs to use their own funds. Support from the lending institutions would have provided additional fillip to the SME sector, CRISIL said in a research note.
SMEs’ revenue grew 29 per cent, while raw material costs increased 31 per cent in 2010-11. Their operating margin declined one per cent, on account of inability to pass on increase in input costs entirely to end-users. The enterprises’ profit after tax, however, grew four per cent, despite mounting working capital requirements and costs of borrowing.
SMEs’ equity capital, referring to funds brought in by the promoter himself, increased 29 per cent, while loans from the promoters’ family and friends increased 24 per cent. This indicates a larger portion of the SMEs’ additional funding requirements were met through promoters’ funding than through borrowings from banks.
Sachin Nigam, senior director, SME Ratings, CRISIL said easy access to bank funds had always been difficult for SMEs. The enterprises maintained adequate liquidity both with their own funds, and through improved cash management. Availability of additional funds at competitive rates would have helped SMEs pursue their growth plans aggressively, and to fund working capital requirements.
