One-fourth of listed SMEs find it tough to service bank loans

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One out of four listed small and medium enterprises (SMEs), which had taken bank loans, is facing serious challenges in servicing debt, and even interest.

In percentage terms, as high as 46.3 per cent of the bank loans extended to listed SMEs (with revenue sizes below Rs 3,000 million) are in significant stress, according to a recent study by India Ratings & Research (Ind-Ra).

SMEs’ portfolio mostly includes companies from chemical, textiles, power, real estate, steel and construction sectors.

Ind-Ra felt that unless the working capital days of large corporate come down below 50, the working capital cycle of SMEs is unlikely to improve.

A senior KPMG India official said this phenomenon could be attributed to economic slowdown and high interest rate regime. When small and mid-sized companies take loans, planning for some infrastructure development, and if that is not achieved due to general economic conditions, it becomes extremely difficult for them to service the debt.

He said in India, banks mostly give mortgage loans and instances of cash flow based loans are rare. When loans are given, the repayment capacity on the basis of viability of the business model is not given as high weightage as the mortgage value.

But SMEs’ ability to revamp and rearrange their business model is limited. Deep N Mukherjee, senior director of India Ratings & Research, said SMEs had been the first casualty of the current cyclical downturn. The revenue growth (median) of small companies has fallen from FY10 and has been in low single digits since FY11. But the revenue growth for large companies (represented in BSE 500) and medium companies has

tapered off FY13 onwards.

“Working capital cycle (median) sharply deteriorated for SMEs to 104 days in FY12 from 85 to 87 days in FY11. Further working capital cycle deterioration may virtually wipe out a large number of SMEs,” said the Ind-Ra report.

Monish Shah, senior director of Deloitte in India, however, is optimistic. “The MSME sector is highly vulnerable to economic cycle. There are already signs of green shoots. Once that happens, working capital cycle for MSME will improve,’’ Shah told FC.

ritwikmukherjee

@mydigitalfc.com

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