Big hit for small players

Consider the magnitude of the rise. A small unit used to get bank funds at 8.5-9 per cent two years ago. 8220;Now the rates have shot up to 14 per cent. This is a jump of over 50 per cent in less than two years. This is adding to the costs of the company,8221; says Nayan Patel, who heads the Indian Merchants Chamber.

Why are the rates rising, and more importantly, this rapidly? For answers, one has to look at the policy readings of the Reserve Bank of India, the banking regulator, in the last year. The central bank of the country has been increasing its key benchmark rates8212;like cash reserve ratio, or the portion of deposits to be kept with the RBI, and repo rates, or the rate at which the RBI lends funds to banks8212;to push up the interest rates in the banking system in a bid to check inflation, high growth in money supply and credit offtake. But many, like the All India Association of Industries president Vijay Kalantri, feel the frequent hikes in rates to contain inflation will contain the growth of the SME sector as well.

For companies, which enjoyed a low interest rate regime in the past five years, the sudden shift in policy is making them nervous. A big company like the Reliance Industries can float a public issue for Rs 5,000 crore without any repayment commitment. But a small unit like the Rs 1.5 crore RK Kitchen Equipment Ltd, which employs 10 people with an annual turnover of Rs 1.5 crore, cannot hope to go in for an IPO. 8220;If I need money, I will have to borrow at the rate of 14-14.5 per cent interest from the bank. I can8217;t afford this,8221; says R. Ramakrishnan, director of the company. Alternatively, a big company can tap overseas banks for low-cost funds. Again, it8217;s not feasible for a small unit to tap overseas banks for small loan amounts. So while on one hand, the high interest rates will choke the fund pipeline for thousands of units, on the other hand, the rising interest burden will see their production cost shooting up, making their products uncompetitive in the market.

With many SMEs becoming global players and part of the global supply chain, the rise in production cost will price them out of the markets. That8217;s a sure recipe for disaster. The banks are flush with funds, but these units are unable to access them as the high rates are bound to get them into a debt trap, leading to the closure of units. If a unit closes, not only will jobs be on the block, but the unit will default on the loan. So it8217;s a loss for banks as well.

What8217;s the way out? Unlike big companies, options are limited for small and medium units. 8220;Small units can overcome this problem by improving their efficiency levels and through a faster collection,8221; says Kapoor. It8217;s easier said than done. Cheaper funds seems to be the only option for the SME sector. For this, the RBI will have to roll back its recent measures. The earlier, the better.

We can8217;t sustain such steep hikes

G. Ananth set up Revathi Enterprises in 1990. Ananth, who has a mechanical engineering background, shifted from 8220;an air-conditioned 9-5 service set-up8221; to a 8220;tin shed and mud floor8221; to start a small unit. The year was 1991 and competition in the business of sheet metal fabrication was 8220;not much, but the incentives and credit support was good8221;.

The target then was a turnover of Rs 100 crore by 2011. Today, RBI Governor YV Reddy8217;s prescription for high rates for credit borrowing is pushing Ananth to change the mathematics and take a cautious approach.

The timing could not have been worse. He is now forced to look for borrowings elsewhere. 8220;With a tangible net worth of Rs 4.5 crore, and cash credit limit of Rs 3.5 crore pushed to Rs 4.5 crore, the numbers are big. We are going in for term loans of Rs 2 crore to Rs 3 crore as there are expansion plans in the pipeline,8221; Ananth says. Siemens Germany had listed Revathi enterprises as one of the suppliers of raw material for the Mumbai Metro project. 8220;The business cannot sustain such steep rates. So I opted for term loan from external international basket assuming that the Euro may not appreciate,8221; says Ananth. While Ananth8217;s quick response to Reddy8217;s attempt at curbing inflation might be wise for term loans, he still is at his wits end about meeting his working capital needs. For a unit that employs 125 employees, the working capital becomes a huge factor in the price parity. 8220;Every time the interest rate rose by one percent, I look at it from a business perspective. It is a rise by 10 per cent as for us businessmen interest is also a commodity. For working capital, there is no escape. My cost of production will increase. If borrowings remain at these levels, it will result in cost escalation of my final product,8221; he says. In simple words, it means business has become non-competitive for Ananth and many others running small and medium units. 8212;Smita Nair

After the quake, the aftershocks

For Champalalji Parakh, the past five years have been of continuous growth. It hadn8217;t always been so. While he was trying to set up a salt refinery at Bachau, the January 2001 earthquake destroyed it. The tax holiday and duty relaxations for Kutch helped him rebuild his factory. In five years, Parakh8217;s Ankur Chemfood Products in Gandhidham graduated from a small to a medium enterprise.

But just when Parakh thought everything was going right8212;booming economy, easy loan availability, good business8212;came the aftershock. Parakh had taken a loan of over Rs 50 lakh from a private bank in 2001 and to his horror found the interest rates rising steadily. Now, he is struggling to get his profits. 8220;I cannot think of expansion,8221; says Parakh, who hails from Rajasthan. 8220;Forget growth, my worry is how to maintain the current profit margin given the increasing interest rates.8221;

It8217;s the same story for other SMEs in the port town of Gandhidham. Since August 1, 2001, seven months after the devastating quake, about 150 units have come up in the region. About 80 per cent of these units are SMEs, running solely on credit. Unlike the big sector, the SMEs do not have access to other sources of domestic and foreign funds. 8220;This time the rate hike is on the higher side. It is directly going to affect the production cost, which will eventually bring down the production,8221; says Parakh. At the prevailing rates, which are 1.5 per cent higher compared to the previous rise, it will be difficult to maintain the production of 1,400 tonnes of free flowing salt per day. The other 10 salt refinery units, with two of medium size and the rest smaller, are also facing the heat.

Parakh has other concerns as well. At his son Hiralal8217;s unit, Oswal Pvt Limited at Nani Chirai village, 17 km from Gandhidham, expansion plans had just taken off before they came crashing. The aim was to double the unit8217;s production of 3 lakh plastic bags for cement companies. Now it seems highly unlikely. 8212;Hiral Dave

If the rates go up, I8217;ll have to shut down my unit

R. Ramakrishanan8217;s plans have gone astray. Says the promoter of the Rs 1.5 crore RK Kitchen Equipment, a Mumbai-based small-scale unit: 8220;Banks are eating away my profits. They are going away as loan or interest repayment. I used to pay Rs 18,000 per month as interest till last year. Now I8217;m paying almost Rs 25,000 per month,8221; says Ramakrishnan, who started his company at downtown Bhandup in 1990. 8220;I have 10-12 employees and will run the unit as long as I can. But if the rates go up further, I will have to close it down.8221; The banks are willing to give loans to expand his business, 8220;but how can I go for more loans at this high interest rate?8221; he asks. While the demand for his products has not come down, 8220;the high interest charges are adding to the cost. It8217;s not viable to set up a unit only by borrowing funds from banks,8221; he says. 8212; George Mathew

It8217;s difficult for me to survive

Dalbir Singh Panesar is feeling the heat these days. And it8217;s not because of the rising temperatures in Ludhiana. The chairman of KW Enterprises and K Star Industries, the bicycle parts units, is finding it hard to keep pace with the rising rates of interest.

Says his son Harjinder Singh: 8220;In cycle parts, value addition is less and the main addition is in raw materials, which are nickel and steel. The prices of both the products are also increasing. While steel prices have gone up from

Rs 3,000 a tonne two years ago to Rs 5,000 per tonne, nickel prices too have gone up by nearly 65 per cent in a year. It8217;s really difficult for me to survive.8221;

His unit hasn8217;t registered a profit in the past two years, the cash flow is restricted in the market and he can8217;t have his bank credit limit raised. It8217;s been a rough ride, and Panesars are praying for a reprieve.8212;Raakhi Jagga

Larger units can borrow. What about us?

Overnight, Rajnish Ahuja has turned a worrier. The owner of Ludhiana-based Rajnish International, which exports automobile parts and supplies them in the domestic market, is wondering how to tide over his losses. 8220;Last year, the dollar went up by 5.7 per cent, while my loans for the export sector increased from 7.35 to 9.75 per cent. In the domestic sector, my loan rates increased from 11 to 14 per cent.8221; Ahuja paid nearly Rs 1.5 lakh more as loan interest in the previous financial year. This has reduced his profit margin. 8220;This year, I8217;m expecting a steeper hike and am facing a shortage of working capital. Larger units can borrow from the international marker at cheaper rates, but what about the small enterprises?8221; asks Ahuja, president of the Focal Point Industrial Shed Association. More than 60 per cent of industries in Ludhiana fall in this sector, and like Ahuja, are looking for solutions. As of now, they have none. 8212;Raakhi Jagga

Big tannery owners are getting richer, small ones, poorer

Before Mohammed Hasan set up his industrial unit, Decent Tannery, at Jajmau in Kanpur, 20 years ago, he thought hard about it. After all, there were over a 100 small and medium scale units on the banks of the Ganga. What carried Hasan through was his confidence, based largely on the easy credit schemes. The confidence is shaken today.

Jajmau shares Hasan8217;s anxiety. The Jajmau Tannery Association claims that over a 100 tanneries have closed in the past decade due to non-payment of dues. Many smaller units are on the verge of closure or have shifted to other industries like chemicals due to heavy debts. With the interest rate rising from 11 to 14 per cent, people are being forced to pay back from their profit margins. 8220;We have seen several tanneries closing down, so we are worried about our future. We wonder how long we8217;ll be able to survive in this industry,8221; he adds.

It8217;s an industry that8217;s fighting against many odds. They are either short of raw material or are under pressure to pay back the loan which was taken to install or modernise the machinery. With Kanpur facing a power crisis and a dismal infrastructure in place, the latest blow could be the last. Says Shahid Hussain, Hasan8217;s partner and JTA general secretary: 8220;The government policies are making the rich tannery owners richer and the poor read small and medium tannery owner poorer.8221; 8212;Rao Jaswant Singh