Business Today

Even tiny rate hikes hit small enterprises hard

A one per cent rise in lending rates would lead to a dip of 14 per cent, on average, in the profits of small and medium enterprises (SMEs), says a study by Crisil.

Mail Today Bureau   New Delhi     Last Updated: February 1, 2011  | 13:49 IST

A one per cent rise in lending rates would lead to a dip of 14 per cent, on average, in the profits of small and medium enterprises (SMEs), says a study by Crisil.

"One-fifth of the enterprises evaluated could face erosion of 25 per cent or more in their pre-tax profit levels (when lending rates go up by one per cent)," Crisil said in the study on the financial performance of over 3,000 rated SMEs. The study covers 3,234 SMEs with sales turnover ranging from Rs 1 crore to Rs 500 crore. It includes manufacturing, trading and service companies in 30 industries across 20 states.

Commenting on the impact of interest on SMEs' profits, Ramraj Pai, director, SME Ratings of Crisil, said: "Crisil's study reveals that enterprises using capital efficiently, and deploying debt sparingly, would be the least affected."

In the study sample, 2,200 firms were very small with sales of less than Rs 20 crore. Over half of these small companies had low levels of debt (debt-equity ratio below one), making them less vulnerable to interest rate hikes than their more leveraged peers.

"SMEs that are more capital-efficient, as measured by the return on capital employed (RoCE), are less vulnerable to an interest rate hike," Crisil said. About 52 per cent of the companies in the sample have a high RoCE (exceeding 15 per cent) and the impact of interest rate increases on these companies will be minimal.

SMEs play a vital role in the growth of economy.

They contribute 45 per cent of the industrial output, 40 per cent of exports and provide employment to 4.2 crore people. The sector also creates 10 lakh jobs every year and produces more than 8,000 quality products for the Indian and international markets.

The study brings out other unique insights.

Enterprises in the service space are relatively insulated from the effect of interest rates, compared with SMEs in the manufacturing and trading sectors.

Industries like chemicals, metals and engineering are better placed while food processing, textiles, paper and agriculture-related industries are more susceptible to interest rates changes. The financial performance of SMEs based in Maharashtra, Karnataka and Madhya Pradesh is less influenced by interest rates than that of SMEs based in Haryana, Punjab, Andhra and Himachal Pradesh.

Courtesy: Mail Today

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