Mumbai Two senior bankers said the real impact of the interest rate hike on India’s small businesses would be visible only by the end of this year, when restructured loans and some fresh loans taken under a sovereign-backed program come up for repayment.
These bankers, one of whom spoke on the condition of anonymity, said that so far, the micro, small and medium enterprise (MSME) sector has been able to repay their loans on time with minimal delay. However, successive rate hikes will certainly impact their ability to repay in the coming months.
It is estimated that a major chunk of the new loans under the Emergency Credit Line Guarantee Scheme (ECLGS) launched in May 2020 went towards defraying the interest cost. Some of the ECLGS repayments have already started from last September and the second phase will start by the end of this year.
“ECLGS loans were taken by small businesses hit by the pandemic and since there was a moratorium of 12 months, the real test of their recovery will be seen only after the repayment starts. For loans where repayment has started from September, our experience has not been very discouraging and whenever defaults have happened, they are still under control,” said a senior banker.
The RBI has already hiked repo rates by a total of 90 bps in May and June and economists expect the central bank to hike rates further to contain rising inflation. For small businesses, any increase in the repo rate will immediately translate into higher borrowing costs as their loans are linked to an external benchmark. Since banks use marginal cost of funds based lending rate (MCLR), which is an internal benchmark, for lending to large corporates, transmission is relatively slow.
A little over 69% of all floating rate small business loans were linked to an external benchmark as of December, while only 20.4% for large industries, RBI data showed. “While some stressed small businesses have been able to overcome the cash flow disruption induced by the pandemic, the rest have not. Last year, a major part of credit growth for small businesses was impacted by lower interest rates of 6.5-7% and now, when rates have increased by 90 bps, it will dampen their sentiments,” the banker said. quoted above.
Government and RBI initiatives seem to have supported small businesses, but not all are out of the woods yet. According to an analysis by Bank of Baroda, a sample of 303 micro enterprises saw negative growth in sales for the third consecutive year in FY22. This shows that even before the pandemic, the micro sector was not doing well, which intensified in FY2011. “MSMEs which faced severe stress due to COVID-19 were allowed to restructure their loans and also given fresh loans under the ECLGS scheme of the government. Some of these small businesses were already vulnerable and a hike in rates could further reduce their ability to repay on time,” said Suresh Khatnahar, deputy managing director, IDBI Bank.