SMEs unhappy at interest rate hike

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SME Times News Bureau | 27 Jul, 2011
The country's Small and medium enterprises (SMEs), especially in realty sector and the automobile industry have expressed their concern over the Reserve Bank of India's (RBI) decision to hike interest rates by 50 basis points to tame inflation - a move which sets the stage for commercial banks to raise interest charged on personal and corporate loans.

Industry experts say the slow-down in sales due to high interest rates on home loan will only worsen, as small builders would now have to pass on even the extra cost of borrowing for new projects on customers.

"As real estate developer, we are not left with any choice but to pass on the same to our buyers, resulting in increase in property prices," said Pradeep Jain, chairman of Parsvnath Developers Limited who also heads the Confederation of Real Estate Developers' Association of India (CREDAI).

Jain said that rate tightening in the past 17 months has already resulted in moderation of growth coupled with fall in consumption of cement, steel and automobiles during the first quarter of 2011-12 fiscal.

"The effects of slower growth have also been seen in sales of everything, may be real estate, may be car sales etc," Jain said.

The rate hikes were effected by Reserve Bank of India (RBI) Governor Duvvuri Subbarao during the first quarterly review of the apex bank's monetary policy for this fiscal conducted at his headquarters in Mint Road in the national capital.

The repurchase rate, the interest the central bank levies on short-term borrowing by commercial banks, has been hiked to 8 percent from 7.5 percent and reverse repurchase rate, or interest paid on short-term lending, raised to 7 percent from 6.5 percent.

In the automobile sector, apex industry body of automobile manufacturers says that the 50 bps hike in the interest rates announced by the RBI could hit passenger vehicle sales very hard.

Pawan Goenka, president, Society of Indian Automobile Manufacturers (SIAM) said, "The subsequent rate hike by the RBI has led SIAM to scale down passenger vehicle sales forecast for this year, from 16-18 percent down to 10-12 percent."

"We will have to wait and see the response by the banks to this latest interest rate hike to assess the real impact on the market," Goenka said.

SIAM said that the auto industry, which is already reeling under the pressure from high interest rates, fuel and input costs, could see further dampening in short to medium term sales as buyers may decide to postpone vehicle purchase.

"The growth rate of the passenger vehicle sales has dropped from about 33 percent last year to about nine percent during the last quarter," SIAM said in a statement.