Unless the lending rate is brought down to 10 pc, SMEs, commonly perceived as risky borowers, are likely to lose out on loans as banks would prefer lending to larger corporates and the governmentBANGALORE, INDIA: Few days back, the State Bank of India (SBI) said that it would cut lending rates on loans given to small and medium enterprises (SME) this month. Strictly speaking, this is not great news for SMEs. Various banks have various interest rates for SME loans ranging anywhere between 12 and 17 per cent depending upon the loan amount. If at all, any bank decides to reduce the interest rates, it should bring the interest rates to 10 perc ent or base rate of interest on large borrowings.
Since the SME sector is playing a vital role in providing employments and alleviating poverty, this sector should get the same attention as the agriculture sector gets. Today the state government budget speaks about four per cent interest on agricultural loans. Similarly, there is an urgent need to increase credit facilities and improve infrastructure development for the SME sector.
Credit rating firm Crisil in its report (published in 2011) had said that a one per cent hike in rates would lead to a decline of 14 per cent in the profit of SMEs.
The study found that small companies with low level of debt are less vulnerable to interest rate hikes than their more leveraged peers. Besides, SMEs which have more capital and efficient are less vulnerable to increase in interest rate.
There are also opinions from a section of SMEs that they stand to lose out on accessing loans because banks will prefer lending to larger corporates and the government. SMEs are seen as risky borrowers. SMEs need to be looked at differently and banks should adopt more flexible approach while lending to SMEs. The higher interest rates will affect the bottom line of SMEs badly.
Yes, there are other options too for SMEs to raise funds like raising private equity, venture capital or going public -- but these options are suitable only for a set of SMEs which have proven their credit worthiness in the market. Upcoming SMEs still look at banks for their financial assistance.
It is really disappointing that the union Finance Minister didn't make any effort in easing funds flow to SMEs in his latest budget.