RBI's pause on key rates worries SMEs

Finance cost to the total production cost sees sharp jump over past 2 yrs.

Even as the Reserve Bank of India (RBI) has decided to hold its monetary policy tightening measures by keeping the key rates unchanged, small and medium enterprises (SMEs) have raised concerns over the continued high cost of bank finances. In its mid-quarter monetary policy review last week, the RBI kept the cash reserve ratio (CRR) unchanged at 6 per cent, while repo rate and the reverse repo rate remained unchanged at 8.5 per cent and 7.5 per cent respectively. Meanwhile, banks have not shown any indication of modification in the current interest rate structure for loans.

"Things are not favourable at present, at least for the SMEs. Especially, after RBI's status quo on key rates, the recovery seems to have just got delayed by a quarter or so. We expected a rate cut as industry was bleeding heavily in the high rate regime and costly inputs. There is no likelyhood of a rate cut from the banks in the current situation," said Shankarbhai Patel, president Gujarat Dyestuff Manufacturers' Association (GDMA).

Gujarat houses nearly 15 per cent of the country's 1.1 million micro, small and medium enterprises. SMEs operational in the fields of textiles, dyes and chemicals, pharmaceuticals and engineering are believed to be the most affected due to the high cost of interest. However, RBI had recently announced a 2 per cent interest subsidy on rupee export credit to SMEs considering the global economic weakness. But industry insiders claim that the benefits of the interest subvention remained restricted to the exporting SMEs, while a majority of the SMEs operated domestically.

"We expected a reduction in the interest rates. High interest rates have huge impact on the small industries, especially when they have lesser bearing capacity. But the recent step by RBI shows that it has taken a halt in the rate hike and we can now hope a reduction gradually," said Nitin Parekh, chairman of finance, banking and insurance committee at Gujarat Chamber of Commerce and Industries (GCCI). Parekh is also chief financial officer at Cadila Healthcare Ltd, a leading pharma and FMCG player.

According to industry insiders, over the past one-two years, interest rates have gone up by around 2 per cent from 11-12 per cent in 2009-10 to 13.5-14 per cent now from various lenders. "Interest rate reduction should be on a priority as domestically too we have to compete with overseas players, who get loans at a cheaper rate. Countries like Japan offer loans at interest rates of as low as 3-5 per cent, which gives companies an edge over Indian companies," maintained Patel.

According to him, share of finance cost in the total cost of production has seen a sharp jump over the past two years. The portion of finance cost has almost equalled the fuel cost for chemical industries. "Across sectors, the finance cost has jumped to about 8-10 per cent of the total production," added Patel.

Echoing similar sentiment, Mahendra Patel, managing director, Lincoln Pharmaceuticals Ltd informed that high interest rates have become a major burden on the SMEs. "Future looks grim for the SMEs in the current situation. Higher interest rates have distorted growth prospects and increased input costs for the small industries," he said.

However, some believe that RBI's step is a move in the right direction as it has shown a ray of hope by pausing a series of rate hike, first time since March 2010.

"This should be taken as a positive development. The rising trend in the interest rates has finally stopped. Now onwards, we can expect rates to start falling and environment getting favourable. However, overseas markets still remain a concern but domestic market will drive the demand growth," said Jayvadan Bodawala, president of South Gujarat Cooperative Bank Association (SGCOBA).