Today, a lot of attention is paid to the development of small businesses worldwide. Even though international financial institutions and commercial banks support small and medium-sized enterprises, small and medium-sized businesses face more financial hurdles than large companies. The limited information available regarding small-scale enterprises raises the risk associated with giving funding to them, causing banks to shorten loan repayment periods and increase interest rates. The financing of small businesses has received much attention in recent years. The Reserve Bank of India has established several regulations and policies to improve credit flow to the small-scale economy over time, but on the other hand; the RBI hiked the repo rate twice by a total of 90 basis points in May and June this year as an attempt to curb the inflation levels which have risen unprecedently.
Experts explain that this increase in repo rate has thereby created a direct impact on lending rates which adversely affect small businesses as, on the one hand, bank borrowings would lead to extra costs on the other hand. Reducing borrowings would hamper the revival and growth of these small businesses. These developments also come when small companies are trying to keep up with rising raw material costs and an uncertain business outlook. This video can better explain this condition, demonstrating lending rates’ effects. With a drop in profit margins, experts worry whether MSMEs will be able to service the loans they raised in the last two or three years, given the aggressive rate hikes expected.
A report by the State Bank of India on the first repo rate hike said that the rise would increase the interest costs of MSMEs by 54.41 billion rupees ($685m). In comparison, another 75 bps rise would raise the interest costs of the MSME and the personal loan segment by 231.14 billion rupees ($2.91bn).
An article by Forbes states that small businesses cannot keep raising wages for employees and have higher inventory costs, even during a period of high demand. Margins are shrinking for many industries, and business owners pass their increased costs to their customers.
Anil Bharadwaj, secretary general of industry body the Federation of Indian Micro, Small and Medium Enterprises (FISME), says the prices of raw materials, whether they be steel, copper, aluminium or plastic raw materials, have increased anywhere between 30-40 per cent and, in some cases, as much as 100 per cent, limiting the money available for day-to-day business. Add to this higher loan interest rates, which may cripple some of these companies that had so far survived, including during the early months of the pandemic when India was locked down to curb the spread of the virus. He also quotes, “The lives of the companies that took term loans during the last five to seven years, is more difficult. It is important to alleviate some of the pain of these MSMEs. Otherwise, there is a risk of them becoming NPAs [non-performing assets].”
According to world experience, the rate hike affects the development of small and tiny innovative businesses. These businesses ensure socio-economic efficiency and play an essential role in the political programs implemented in the countries. The story of small businesses is crucial in increasing the middle class’s share in society and ensuring economic, social and political stability in the country.