SMEs pushed to the wall
Sep 06 2012, 10:57 | By SME Mentor
India Inc has enough reason to worry. A recent research carried out by Crisil Research, the research arm of one of the largest credit rating agencies in the country, shows that capital expenditure by Indian corporations is likely to dip by 14-15 percent in FY 12-13. Though business houses of all sizes across categories have been hurt, it is the small and medium enterprises (SMEs) who are now finding themselves at the very edge of the cliff. Anil Nath, country head, business banking, commodities correspondent & rural banking at HDFC Bank thinks that SMEs in spite of contributing 45 per cent to the industrial production of India have been impacted due to various factors because "they are the weakest link in the chain."
Given the current market conditions, the SMEs are indeed finding themselves constricted. HDFC Bank however being one of the significant players in the SME sector has been able to grow segmentally and continues to balance its portfolio to ensure that the Bank is not over weight in any one segment. "Despite the market conditions, our SME book remains robust and we continue to look at opportunities to grow the segment." According to Nath, his bank has not become more risk averse to medium and small enterprises and "risk weight age on the pricing for SMEs continues to remain the same as hitherto."
The telltale statistics
However the numbers of non food credit lending by commercial banks at large to do not reflect Nath's confidence. A rough estimate indicates that the loans to the SME sector have become costlier by at least 3 per cent over the last year and a half. "Banks have become more risk averse to lend to the SME sector, because they fear that they are less credible than the bigger units." points out Bhavesh Kanani, financial analyst at Centrum Broking, a domestic brokerage firm. With most banks grappling with rising NPAs banks have become far more stringent in doling out loans to small enterprises."
Data available with the RBI shows that though there has been a rise in the absolute numbers in MSME (micro and small enterprise) lending, the pace has definitely slowed down. Bank lending to micro and small enterprises increased by 21 per cent in FY 09-10, whereas in the following year MSM E lending expanded by only 13 per cent. Evidently it is expected to be much lesser this year.
The data available with SMERA (the only rating agency in India that is dedicated to SMEs) shows that, the percentage of ratings in the upgrade category have been declining. While 38 per cent of the total cases that were reviewed by SMERA were upgraded in 2010-11, in 2011-12 only 21 per cent of the total cases have been upgraded. What's more, the downgrade bias remains in the current fiscal.
Impact of the deepening crisis
The crisis in the Euro Zone has badly impacted the export oriented SMEs. The Euro zone crisis (mainly caused by burgeoning public debt), which began with Greece, has spread like wildfire to other European nations to Spain, Portugal, Ireland and Italy. About 20 per cent of India's exports are accounted for by the European Union while the US contributes for another 11 per cent odd. The slowdown in both of these markets has eroded the revenues' of the export oriented SMEs in India. A diamond exporter illustrated an example of how bad things really are.
Jayesh Patel, proprietor of Surat based MV Enterprises laments that only 25-30 per cent of his business is fully operational as of now. An export oriented firm, most of Patel's diamonds have met the demands of American countries and Hong Kong. "We are sitting on a pile of inventory and panicking because demand from developing economies has nearly dried up." In order to cut costs traders such as Patel are forced to take extended leaves. "During the festival of Rakhi we normally take a leave only on the day of Raksha Bandhan. We have taken a leave of 10 days this year!" Patel exclaims. He is however hopeful that things will look up as the domestic demand shores up in the ensuing festive season in India.
Not all have been as badly impacted as Patel though. As Nath of HDFC Bank points out "As Nath of HDFC Bank points out "A major portion of the output of SMEs is consumed internally and SMEs are capable of passing on a major portion of their cost increase to their consumers, except where the buyers are large corporates and where prices are fixed periodically."
Suyog Machhar owner of Aurangabad based Machhar Packaging Services says that he has been able to maintain business at a steady pace because his is the second largest thermocol manufacturing company in the country. Almost all white goods such as ACs, refrigerators and television sets of Aurangabad headquartered Videocon Industries are packed in Machhar Thermocol.
Machhar however does not say that he is insulated from all troubles that are brewing all around him "I had been relatively ok, because I haven't had any capital expenditure plans in the last year and a half, but I will have to expand very soon" Machhar is anticipating tough times ahead, as there are veritable signs of stretch in the over the last two quarters. "Unless the government induces some policy stimulus that will result in the easing of inflation, SMEs will see a much greater impact on their bottom line." Machhar too is banking on the rains Gods to be more benevolent and the festive season to bring about a change in the fortunes of the SMEs.
The darkness persists
Parag Patki the chief of SMERA paints a more realistic picture. Though a lot of the problems of SMEs are due to the economic conditions, some of it is also their own doing, he feels. He says some of the individual small businesses are suffering because of "unplanned expansion and high leverage." This according to him has led to both operational and financial leverage that has aggravated due to the downturn and is resulting in lower profitability for these businesses.
Over the next two to three quarters SMERA expects further gloom for the SME sector is monsoon continues to be deficient. "From a medium to long term perspective structural dynamics of the global slowdown will bring down the dynamics of SMEs." says Patki. One thing is for sure, the business confidence that was brimming in SMEs till even a year back is nowhere to be seen now, as they live in fear of what nasty surprise is lurking round the corner.
Post Your Comment
Recent Comments (0)