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Sluggish economy, tight credit take toll on small firms

Oct 04 2013, 09:39 IST
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India's prolonged economic slide has affected many companies in India, especially the SME's due to limited access to funds. (Reuters) India's prolonged economic slide has affected many companies in India, especially the SME's due to limited access to funds. (Reuters)
SummaryIndian SME's have been hit by prolonged economic slide due to their limited access to finance.

Sunil Malhotra's expansion plans had a sound logic; they would reduce his company's exposure to imports made more costly by the slump in the rupee this year to a record low. It was an investment to improve profitability.

But banks were unwilling to finance his plan, leaving him instead scrambling to find working capital let alone funds to invest in his firm, Hallmark Steel, a small company supplying the auto industry.

India's prolonged economic slide has affected many companies in India, but small and medium-sized firms have been hit the most because of their more limited access to finance.

Ratings agencies say the debt situation is the worst in a decade, which explains why banks are cautious about lending. That could lead to rising defaults and bankruptcies among small and medium-sized companies, which support a considerable part of the economy - about 45 percent of manufacturing and 40 percent of exports.

"I have gone to not one but three public sector banks for funds and they don't want to lend to any firm in the steel sector," said Malhotra, founder and chief executive of Hallmark Steel in the north India state of Rajasthan.

Malhotra had hoped to raise 500 million rupees to fund the purchase of a melting facility in Nagpur in western Maharashtra state, aimed at reducing Hallmark's reliance on imported raw materials.

"We wanted to get out of imports because it was hitting our margins because of dollar fluctuations," he said, adding that banks are asking for collateral equivalent to more than 130 percent of the loan size, from 80 percent previously.

DEBT DOOM

Ratings agency Fitch expects non-performing loans at Indian banks to be as high as 4.5 percent in the fiscal year to March 2014, a nine-year high.

Those that can get credit are forced to pay more as interest rates rise, with the Reserve Bank of India's unexpected rate hike on September 20 making credit even costlier.

Earlier central bank measures to defend the rupee by tightening market liquidity had already pushed up the cost of short-term funds.

The Mumbai interbank offered rate (MIBOR) has risen by almost 300 basis points since mid-July when the central bank announced its measures to bolster the rupee.

"We are arguably looking at the worst credit metrics in 10 years," said Deep Mukherjee, a director at Fitch Ratings. "Midcaps have a smaller scale of operations so they don't have bargaining power," he said.

Smaller companies already have some of the worst debt

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