MSME body warns of more crisis on credit flow dips

The MSME sector has warned that if banks continued to held back funds and kept raising interest rates, the already-struggling sector will be facing more problems, including more defaults.

"From the demand side, the rising interest rates would mean a  reduction in the number of SMEs taking loans or reducing their bank loan amount. This will have a huge impact on output and growth of this sector," SME Chamber President Chandrakant Salunkhe warned.

After the first quarter monetary policy on July 26, leading bankers told the Reserve Bank that they were already witnessing stressed assets from the MSME sector and warned that it would only go up in the coming quarters.

Salunkhe further said the industry was expecting only around 14% growth in credit flow to the sector this fiscal. Last fiscal, the credit offtake by the MSME sector grew 17% to Rs 4,27,950 crore.

"For the current fiscal, we see fund flow slowing down further from last year to around 14% to Rs 5,13,550 crore," Salunkhe said.

With the apex bank increasing the interest rates, banks are likely to hike their lending rates and pass it on to the customers, rendering a heavy impact on MSME sector, which is extremely sensitive to hike in interest rates, he said.

A recent industry report prepared by Assocham said there was a steep 20% decline in the profits of MSME players and a higher 24% reduction in their production so far this fiscal, as rising interest rates forced them away from availing fresh bank funds and banks developed cold feet on lending to them in the wake of rising industry defaults.

Salunkhe warned that this drying up of funds will impact the overall development of the sector that contributes nearly 17% of GDP, employs 60 million, generates 1.3 million jobs annually, and contributes 45% of manufacturing output and 40% of total exports.