SMEs feeling the PLR heat

Its not just the retail customer who is fretting over the rising interest rates. Small and medium enterprises (SME) have also begun to feel the heat. SMEs are fearing that the repeated hike in prime lending rates (PLR) is likely to impact their bottomlines.

PLR is the rate at which banks extend loans to their most credit-worthy customers. In the last one year, the PLR of most banks has increased by over 2 per cent. The borrowing cost constitutes around 8 per cent to 10 per cent of the total cost of an SME.

"The rising interest cost will definitely have an impact on the bottomline. The only way to balance the cost is to resort to foreign currency borrowing. The combination of both foreign and local debt should enable keeping the cost of borrowing at a single digit,'' said Arun Agarwal chief financial officer, Bhushan Power and Steel.

"Small companies are highly sensitive to interest rates movements. Companies with a turnover of less than Rs 25 crore do not have much negotiating power and they are the higher risk category borrowers. The constant rise in borrowing cost will impact their competitiveness and profitability as in the current market it will difficult for players to pass on the cost to the ultimate beneficiary,'' said J Chandrasekaran, chief general manager, State Bank of India.

Corporates with a turnover of around Rs 50 crore would be able to avail credit at sub-PLR levels (10.75 per cent to 11 per cent), depending on their cashflows and risk profile. On the other hand, companies with a turnover of less than Rs 50 crore would be able to avail credit at 13 per cent and above.

``Working capital loans and term loans for most of the mid- tier corporates are linked to the PLR and are floating rate loans. The interest costs is set to rise. It's difficult to pass on this kind of cost increase to the customer. Hence our future profitability is likely to be impacted,'' said a chief executive officer of a steel company.