‘Higher interest rates will affect bottomline of SMEs'

The small and medium enterprises sector needs to be looked at differently and lenders need to adopt a flexible approach while working with entrepreneurs, understanding their business models and finance requirements, says Mr K.V. Srinivasan, CEO – Reliance Commercial Finance & Reliance Home Finance. In an interview with Business Line, he explains that while higher interest rates are likely to affect the bottomline of SMEs, which may in turn lead to rise in NPAs, proper credit quality assessment would help in minimising bad assets.

What in your estimate is the growth potential for the SME segment during the current year? Which segments are likely to see good growth and which segments are likely to see a slowdown?

Today, the SME sector accounts for nearly 35-40 per cent of the country's output and this sector will continue to grow in the future too. We are very optimistic about the growth of healthcare, education, hospitality and the food processing sectors because of the rise in income levels, increased awareness & growing desire among the population for better products and services. Moreover various initiatives undertaken by the government would also add impetus to these sectors.

On the other hand, the auto industry is expected to see a slow down because of slump in demand due to rise in oil prices & high interest rates. This is turn may affect auto ancillary sector due to lower off take and decreased capital expenditure by companies. Gems & Jewellery sector may also be impacted due to the recessionary pressure in the global economy and high commodity prices.

We at Reliance Commercial Finance closely monitor various industries and based on their prospects create tailor-made offerings. For instance, for the healthcare players, we provide finance for approved medical equipments, refurbished equipments and hospital infrastructure, which includes purchase of commercial property and construction for expansion purposes. For the education institutes we offer loans against fee receivables for creation of additional facilities. The SME sector needs to be looked at differently and we adopt a very flexible approach while working with entrepreneurs, understanding their business models and finance requirements.

What is the impact of high interest rates on the SME sector? Will it lead to a slowdown in flow of funds to this segment?

Historically, the SME sector has witnessed high growth rates in spite of sluggish global demand, increased cost of raw materials and intense competition from international countries. However high interest rates would certainly impact the SME segment in some ways - servicing high costs loans would be a challenge, increased finance costs may lead to project delays/deferment of capital expenditure and the ability to pass on the increased costs to the end customer may be limited in some sectors.

We are conscious of the financial impact, which is why we constantly revisit sectoral needs and offer innovative products. For example, we customise products based on cash flows in the business so that the SMEs do not get restricted in terms of fund raising avenues. The SME sector has demonstrated resilience in the past and we believe that the sector will be able to withstand the current environment.

Will the SME segment see a rise in bad assets as repayment becomes tougher due to high interest rates?

The higher interest rates are likely to affect the bottom line of SMEs which may lead to rise in NPAs. However, we feel that proper credit quality assessment done at the time of lending will help in minimizing the bad assets. We, as a mandate meet all SME clients prior to sanctioning. Furthermore, we also conduct an asset or end verification post disbursement. Our sales and credit teams also regularly interact with customers and industry experts from time to time to keep abreast of the trends and changing requirements. Apart form this activities like quarterly audits by lenders, increased transparency and better corporate governance practices on part of the SMEs would help lenders pre-empt any crisis and take suitable corrective action.

What are the fund raising options for SMEs other than borrowing? Is private equity or capital markets an option they can consider?

SMEs can explore the option of raising funds through angel investors, venture capitalists or private equity players. SMEs that have good governance stand a better chance in attracting external capital. We also feel more comfortable in lending to such organizations. Moreover, guidelines are being framed to provide a separate exchange for SMEs to provide them an opportunity to raise funds from public.

What other services apart from lending can banks and NBFCs offer to the SME segment?

Banks and NBFCs can partner with SMEs by contributing to their growth story. They can provide financial advisory services particularly on sourcing funds, managing cash flows and optimal deployment of funds. And it's not always about SME loans alone. We also offer various other loan products and services, which equip them in their day-to-day working. For example by availing of loans against gold or loans against property they can raise funds for their own contribution to their business. In addition, we offer property solutions in terms of buying, selling and leasing properties.

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