Comments
Small and medium enterprises (SME) find themselves at the end of the tether as the interest-rate cycle takes its toll, exposing them to the risk of default.
Mr Amitabh Chaturvedi, Managing Director and Chief Executive Officer, Dhanlaxmi Bank, sees a likely trigger in the next round of interest-rate hike, if and when that occurs.
RBI PRIORITY
“Another 50 bps (basis points) in hike may just about see us through, but beyond that defaults will definitely begin to happen,” Mr Chaturvedi told Business Line .
The Reserve Bank of India's priority to hold the price line would imply a 25 to 50 bps hike in its policy-making meeting due next month.
SMEs neither boast a big order-book nor do they have large margins to fall back on. They can hold on only for so much, and could go under if rates soar. This makes them the most vulnerable asset class.
Mr Chaturvedi said SMEs, which had been reconciled to borrowing rates of 10 per cent, are suddenly faced with the ‘new normal' of 14 to 15 per cent.
DOUBLE WHAMMY
The SME customer — typically a manufacturer, exporter or service provider — finds himself between a rock and hard place. Not only has turnover been hit by the downturn in the economy, exports, too, have failed her.
The bank's loan book has a 38 per cent exposure to large corporates, 40 per cent to retail and only 15 per cent to SMEs, with the rest going to agriculture.
Ironically, it is in the SME sector that the bank is growing assets this year as part of a policy decision made in advance.
CAREFUL SELECTION
The bank said it would be ‘very careful' about selecting an SME customer from now on. But this is not to suggest as if the entire SME portfolio is going to default.
“We need to be a little careful about companies engaged in services or export business. Manufacturing SMEs should sustain by smartly adjusting production even as they take care not to idle working capital,” Mr Chaturvedi said.
Comments
COMMENT NOW
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.