'Inflation forcing SMEs to choose own funds over bank loans'

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SME Times News Bureau | 20 Jun, 2012
Indian small and medium enterprises (SMEs) are increasingly preferring funds from their own sources over bank loans to combat inflationary pressures, reveals a new study conducted by rating agency Crisil.

According to the study, conducted on the working capital funding patterns of 3000 SMEs against the backdrop of increasing inflation and input costs, 53 percent of the total funding needs were met through the promoters' own funds and personal loans.

SMEs' equity capital -- which refers to funds brought in by the promoter himself -- increased by 29 percent, while loans from the promoters' family and friends increased by 24 percent.

"This indicates that a larger portion of the SMEs' additional funding requirements were met through promoters' funding than through borrowings from banks. The enterprises maintained adequate liquidity both with their own funds, and through improved cash management. This helped them maintain a higher current ratio (1.88 times) than that expected by banks and other lenders (1.33 times)," Crisil said in a press statement on Tuesday.

As per the findings, SMEs' revenue grew 29 percent, while raw material costs increased by 31 percent in 2010-11 (refers to financial year, April 1 to March 31); their operating margin declined 1 percent, on account of inability to pass on increase in input costs entirely to end users.

The enterprises' profit after tax, however, grew 4 percent, despite mounting working capital requirements and costs of borrowing.

Releasing the study, Sachin Nigam, Senior Director, SME Ratings - CRISIL said, "Easy access to the bank funds has always been difficult for SMEs. Availability of bank finances further deteriorated in 2010-11, due to continuous increase in the cash reserve ratio (CRR), which absorbed the liquidity from the banking sector. This compelled the SMEs to use their own funds,"

He added that support from the lending institutions and availability of additional funds at competitive rates would have helped SMEs to pursue their growth plans aggressively, and to fund working capital requirements.

The study indicates that the segments most susceptible to inflationary pressure were engineering and capital goods, textiles, and chemicals.

"This is because raw material costs account for a major portion of the cost of sales in these segments. The prices of key raw materials such as steel, cotton and chemicals increased sharply in 2010-11, owing to inflationary pressure," it points out.