Interest rate hikes could affect profits of SMEs: Crisil

NEW DELHI: At a time when public and private lenders have hinted at an upward bias in interest rates, credit rating firm Crisil today said that a one per cent hike in increase in rates would lead to a decline of 14 per cent in the profit of small and medium enterprises (SMEs).

"... a one per cent increase in interest rates would lead to a decline of 14 per cent, on average, in the SMEs' profits," Crisil said in a report on financial performance of the sector.

The study found that small companies with low level of debt are less vulnerable to interest rate hikes than their more leveraged peers. Besides, SMEs which are more capital- efficient are less vulnerable to an upward swing in interest rate.

Crisil's report comes at a time when many major banks have hinted that they might go for increase in interest rates. This follows the RBI's announcement last week to hike its short-term lending and borrowing rates by 25 basis points as a means of fighting inflationary pressure.

"Crisil's study reveals that enterprises using capital efficiently, and deploying debt sparingly, would be the least affected," Crisil Director (SME Ratings) Ramraj Pai said.

The ratings firm also found that enterprises in the service space are relatively insulated from the effect of interest rates, compared with SMEs in the manufacturing and trading sectors.

"Second, industries like chemicals, metals, and engineering, are better placed while food processing, textiles, paper, and agriculture-related industries are more susceptible to interest rates," it said, adding that larger SMEs are more sensitive to interest rates.

Besides, the financial performance of SMEs based in Maharashtra, Karnataka, and Madhya Pradesh are less influenced by interest rates than that of SMEs based in Haryana, Punjab, Andhra Pradesh and Himachal Pradesh.

There are 2.6 crore small and medium businesses in the country, of which 1.86-crore are in the services space.

The sector contributes 8 per cent of the nation's gross domestic product, besides as much as 45 per cent of the manufacturing output and 40 per cent of exports.

Besides, the SME sector offers employment to nearly 45 per cent of the working population.

Overall, along with micro enterprises, the SME sector employs nearly 5.97 crore people.