SMEs hit by RBI policy: Chamber

The Apex Chamber of Commerce and Industry today said the business of small and medium sector enterprises had been adversely affected.

Giving reasons for this, president of the chamber, PD Sharma, said, "The cost of raw material is rising, working capital requirement is increasing. On the other hand, there is liquidity crunch in the market and the banking sector. This is mainly due to the wrong monetary policy of the Reserve Bank of India to control inflation."

He said monitoring interest rates was not an effective tool to curb inflation in developing countries as barely 50 per cent of the population in these nations holds bank accounts.

"Moreover, the cost of money is also going up heavily for the SME sector due to the same reason. Interest rates have risen by more than three per cent in the past 15 months. Some weaker public sector banks charge still higher interest rates and thus the borrowers are further handicapped," he added.

The chamber said RBI has put no restrictions on external commercial borrowing. Large companies have access to international market for borrowing and they are able to borrow capital at cheaper rates than those in India. During the period April to December 2006 Indian companies had borrowed $12.5 billion from the international market.

Quoting a UNIDO study, Sharma added that SME sector of India accounted for 35 per cent of exports directly and 15 per cent indirectly in the year 2003.

The performance has improved further. Even within the country banks lend money to large companies at soft rates. As a result SME sector cannot compete with them, the chamber said.

"The RBI should allow banks to raise external commercial borrowings exclusively for small and medium sector. At present some banks have this facility but only for selected borrowers in the SME sector. The facility of soft interest should be extended to all businesses in the small and medium sector."