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How the latest repo rate hike by RBI will impact MSMEs

Credit and Finance for MSMEs: This was the third hike in the repo rate in a row by the RBI after a 40 basis points hike in May this year and 50 basis points increase in June.

repo rate
Typically the central bank increases the repo rate to discourage borrowing by banks in order to reduce the supply of money in the economy and control inflation. (Image: pixabay)

Credit and Finance for MSMEs: The latest hike by the Reserve Bank of India (RBI) in the repo rate – the rate at which the central bank lends money to commercial banks – by 50 basis points to 5.40 per cent will impact borrowing costs for MSMEs, but tackling inflation is a bigger priority right now, according to experts. This was the third hike in the repo rate in a row by the RBI after a 40 basis points hike in May this year and 50 basis points increase in June, taking the cumulative increase to 140 basis points in three months to control inflation “amid deteriorating global economic and financial environment” the central bank said in its monetary policy statement on Friday.

“This (repo rate increase) will lead to the strengthening of interest rates and increase borrowing costs for MSMEs, but at this juncture, it is very important to control inflationary expectations in the economy. Control of inflationary expectations is of paramount importance as inflation is a double edge sword for MSMEs — it not only increases input costs for MSMEs but at the same time increase in prices leads to a reduction in demand,” said Ritesh Jain, Co-Founder of online lending platform Flexiloans.com.

Typically the central bank increases the repo rate to discourage borrowing by banks in order to reduce the supply of money in the economy and control inflation. According to the RBI data, bank credit to micro and small enterprises (MSEs) had increased by 23.7 per cent in June to Rs 14.29 lakh crore from Rs 11.55 lakh crore deployed in June last year. 

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Shrihari Gokhale, COO at digital lending cloud platform Lentra said that keeping a check on the liquidity and expenditure is RBI’s priority even as this will certainly cause a rate hike in deposits and loans.

“The increase in the cost of funds will most impact the feasibility of large and long gestation projects. MSMEs require assurance of funds in addition to the cost of funds. We believe MSMEs will be able to handle this surge in the repo rate as long as it stays in this range over the medium term,” said Gokhale.

Meanwhile, the State Bank of India Economic Research Department in its latest Ecowrap report on Friday authored by its Group Chief Economic Adviser Soumya Kanti Ghosh noted that with 39.2 per cent of the loans benchmarked to external benchmarks (EBR), the increase in repo rate of 140 basis points will eventually increase interest cost on consumers — around Rs 42,500 crore on retail and MSME. This may have an impact on growth, it said.

Also read: 18.34 lakh MSMEs established in FY21-22 employ 1.16 crore people, according to Udyam data

The share of external benchmark-linked lending rate (EBLR) loans by banks had jumped from only 2.4 per cent in September 2019 to 28.6 per cent in March 2021 and further to 39.2 per cent in December 2021, RBI had said.

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