Indian SMEs Hit by Rising Interest Rates in 2011

The rising interest rates from banks have affected the Indian SMEs a lot. The SME sector had to face worries with the substantial increase of interest from 53.60 percent to 60.71 percent after withdrawal of 2% interest subvention from all banks. The higher cost of credit in turn would rise the manufacturing costs and operating costs of the SMEs. It would also slow down the expansion of the businesses.

In January 2011, an interest rate of about 7.5% was paid by a mid-sized company which took loans from SBI and got a subsidy of 2% from the government. But, in February 2011, the interest rate payout increased by quarter of a percent. The interest rates stood at 10% in April 2011 and 10.75% in May 2011. In addition, the subsidy was also canceled. The lending rates were increased by 0.75% by the SBI, 0.5% by ICICI bank, 0.55% by HDFC bank.

According to the CRISIL report, it was said that, with 1% increase in interest rate, there would be an average decline of 14% in SMEs’ profits. However, in some cases, it could even be 25% or more. The report stated that industries related to food processing, textiles, paper and agriculture-related industries were more vulnerable to these interest rate hikes. As the SMEs contribute about 40 percent of the country’s export, there would be an impact on the growth too. The rise in interest rates would end the companies in facing problems with respect to expansion plans.

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