Rate hike to hit SME margins

INTEREST RATES: Smaller corporates may find it harder to kick off new projects as funds become costly.

This week's interest rate hike by the Reserve Bank of India, may hit the margins of the small and medium enterprises adversely, say SME entrepreneurs and economists.

"This rate hike has come at a very critical juncture and it is going to hit the small and medium enterprises (SME) very badly," said R Y Angle, MD of the Mumbai-based Priya Chemicals. "One is going to see large imports from ASEAN countries in the near future as India is on the verge of signing the preferential trade agreement with these countries and most of the products which will be imported are currently produced by the SME sector in India. We will start feeling the pinch of the agreement from next year, when the FTA comes into effect," said Angle.

"At such a crucial juncture instead of lowering the rates, the RBI is increasing interest rates. Our plea to the government is to at least maintain the interest rates if not lower them," said Angle who heads CII's committee on exports.

Over the past couple of years, bank lending to the smaller corporates have shown a significant growth as banks shifted their lending focus to this sector.

According to RBI data, between 2002 and 2005, SSI lending grew from Rs 57,199 crore to Rs 76,114 crore, a growth of 33 per cent. Year on year, SSI lending has grown from 5.6 per cent in 2002-03 to 9 in 2003-04 and to 15.6 per cent in 2004-05.

But the current rate hike may change all this. Said Rajendra Kankaria, managing director of the Pune-based Uma Precision, "Interest rate hike by the banks is sure to impact the small and medium sector negatively. Small industries like us, often work in product segments with low margins and even a 25 bps increase in the interest rate can make a big difference in terms of our cost of production. Also, there is little possibility of passing the additional burden to the customers, as there are long term tie-ups in place."

Added Siddharth Roy, economic advisor to the Tata group, "Raising interest rates will impact the margins of the small and medium corporates adversely. These companies, more than large companies would find it difficult to kick off new projects."

Bankers however, differ and say that the rate hike has already been factored in. Said TS Narayanasami, chairman, Indian Overseas Bank: "It will not have much impact on the lending rate to SMEs as the rate hike was already factored in. However, rates charged to specific SME clients will depend on their credit and risk profiles."