As rates rise, banks fear slowdown in lending to SMEs

Giving credence to fears of slowdown, most banks expect disbursement of term loans to small and medium enterprises (SME) to slow in the coming quarters, as these companies have put their expansion plan on the back burner amid rise in interest rates.

However, the working capital needs of small and medium companies are set to rise, as these firms are expected to increase capacity utilisation in their existing production units, instead of adding facilities.

“We have not witnessed a significant deceleration in SME lending so far. However, in future some slowdown is expected as interest rates have gone up sharply and many companies have put their expansion plans on hold,” said a senior official of State Bank of India (SBI). The country’s largest commercial bank’s SME advances grew nearly 23 per cent to Rs 119,676 crore last financial year.

Apart from high interest cost, expansion plans of SMEs have also taken a hit due to large companies cutting their spending budget.

“Many large companies have reduced their capital expenditure, as they feel the current rates are too high and may come down in future. SMEs also depend on these large companies for getting new businesses. So, there is a cascading effect,” IDBI Bank Chief Financial Officer P Sitaram said.

Bankers, however, dismissed that dwindling loan demand would lead to deterioration in the quality of SME loans.

“There is not much concern on the asset quality because of high interest rates so far. Many of the big SMEs have used their resources to repay loans and they wish to wait for at least three to six months before borrowing further for expansion,” Development Credit Bank Managing Director & Chief Executive Murali M Natrajan said.

Some senior bankers played down the fears, saying it was too early to conclude if a slowdown was imminent, as credit disbursement remained sluggish in the first three months of a financial year.

“The monsoon is not the right season to judge the loan demand for the rest of this financial year. We will have more clarity towards the end of the second quarter or early third quarter,” a senior official of a Mumbai-based public sector bank said.