Makarand Appalwar, 41, chief executive at Emmbi Polyarns, a plastics products maker in Mumbai, is caught in a bind. Export orders have shrunk from the slowing US and European economies, which accounted for a third of his firm?s yearly revenue of R74 crore. The Reserve Bank of India?s serial rate hikes have pushed him to the wall. Small and medium enterprises or SMEs like Emmbi Polyarns are trying to retain existing customers and exploring virgin territories like New Zealand, West Asia, South Africa and Australia, while some others are trying to find strategic equity partners.

Emmbi Polyarns? travel costs have increased as its sales team travels to meet its customers every quarter to retain them. ?Both Australia and New Zealand put together is just a fiftieth of the entire US market,? says Appalwar. The International Monetary Fund and World Bank?s prediction of a deepening credit crisis could impact Indian SMEs further.

?SMEs are getting impacted by the events Europe,? says Monish Chatrath, partner, consulting and markets leader at Delhi-based Mazars, which advises SMEs, large international companies and individuals on investments. ?SMEs are looking to raise funds from European banks at cheaper rates, find partners or purchase companies which take them closer to their customer.?

Emmbi Polyarns said it has appointed a British bank to purchase companies with idle plants and a better network. But some consultants disagree with Chatrath. ?To an extent, loan access from abroad has also been affected as credit history is carefully checked while disbursing loans,? says Sunny Banerjea, head of management consulting practice at KPMG India.

A study by rating agency Crisil released in January 2011 indicates a 1% increase in interest rate amounts to a 14% cut in SME bottom lines. ?There are 2.61 crore micro, small and medium enterprises in India now,? says a study by the ministry of micro, small and medium enterprises released in August 2010.

?Garment and apparel exporters have outsourced their manufacturing to Bangladesh to save costs as wages are cheaper there,? says Pushkar Mishra, assistant general manager, credit, at Small Industries Development Bank of India (Sidbi), which lends to small and medium companies. ?Wages in Bangladesh are 25-30% below Tirupur and Ludhiana, India?s main garment and apparel export hubs.?

Consultants say consolidation to cut costs is also on the cards. ?We can see a slowdown in hiring in leather, textiles and some services companies,? says KPMG?s Banerjea. ?SMEs are in a flux as capital infusion is a crucial issue and interest rates are expensive to automate their plants.?

According to Banerjea, the next 2-3 months will be crucial and export credit will be hit if the Greek bailout is not at expected levels. ?Small and medium enterprises will also find it difficult to enter rural areas because it will be difficult for them to go beyond their state,? he added.

Some SMEs are feeling the pinch as intense competition hits their margin and are paying the price for ignoring African and Asian markets for India.

?In the last one year, wages have increased by 30-50% due to inflation and tough competition, but we have been able to hike prices only by 15%,? says Sushant Gopal Sureka, 34, director at Hindusthan Lace Manufacturing Corporation, a R15-crore shoe laces and elastics maker based in Kolkata. About six years back, the company had presence in the Asian and African region but ignored it to focus on domestic demand. According to him, looking at the inflationary pressures here, the company is looking at reviving focus on these markets, but now faces tough competition from cheaper Chinese products.

?There is a huge drop in demand in the capital goods industry and the SMEs are at the receiving end for this,? says Ambrish Chheda, chairman & managing director at MasterClass, a business consulting firm. ?Many auto component, garment and apparel and capital goods makers who were planning to expand capacity by 20% do not find it viable to make investments at the moment due to high interest rates and lower rate of return.?

Growth in India’s factory output or Index of Industrial Production (IIP) slowed to 3.5% in July, 2011 compared with 8.8% in June, 2011 signalling declining demand for products.

GSK Velu, 44, founder of Chennai-based Trivitron Healthcare, a R400-crore medical technology company, sees demand for top-end products challenging, but entry-level products doing fine. The company plans to make new products in diagnostics, dental technology and ophthalmology. Trivitron currently has under 10% exposure to tier 2 and tier 3 cities, but plans to increase it to over 50% in three years.

?We are also looking at acquisitions in the medical technology space in Europe and India, since valuations currently are attractive,? says Velu. ?Medical firms are focussing on bringing down costs because unlike earlier ? when over 90% of the market was in the US and Europe ? growth is more in developing nations like Brazil, Russia, India, China, Latin America, the Middle East and Africa.?

Kolkata-based KIG Kraft Tech Containers, a R5-crore paper packaging maker, predicts a 5-10% decline in demand. ?There is no pressure this year during the festive season of Durga puja or Diwali unlike the mad rush of orders seen last year,? says Hemant Saraogi, director. KIG is looking at entering newer segments like defence-related goods packaging and horticulture-related packaging. ?Display boxes used in malls in multi-coloured formats are growing rapidly at the moment,? he says, adding the company wants to increase its factory capacity but feels the pinch of high interest rates. ?Where we have already progressed with the capacity addition by 60-80%, we obviously cannot cancel the project but are definitely reducing our expansion growth targets for future projects,? Saraogi added.

Banks have become more selective, sharper and stringent in disbursing loans to SMEs. Says Manish Jaiswal, SME head at private bank Dhanlaxmi Bank: ?We have certainly more checks on the loan disbursal side like a good business track record, great visibility, not-so-highly leveraged companies and healthy quality of cash flow with lower entry and exit barriers.?

The bank focuses less on export-related sectors that have less reliance on domestic consumption like textiles or leather. ?There is a slowdown in capital expenditure loans and greenfield projects are definitely not there at the moment,? says Jaiswal. The bank lends 45% of its loans to wholesale and retail traders, 30% to manufacturing companies and the rest to services providers.

According to him, banks see companies switching to smaller loans than large ones. Companies are also looking to halve their working capital cycle, where they request for early payment from customers from the traditional 120 days to 60 days.

?Many SMEs are entering different countries or offloading their stock in the domestic market through the local buyers at lesser margins,? says Jaiswal. ?Tirupur’s textile belt is going through a phase of consolidation and has moved away from Europe and the US, and is looking at Africa.?