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'Double-digit wholesale inflation to deteriorate MSMEs' working capital'
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SME Times News Bureau | 20 May, 2022
Working capital of Indian MSMEs would deteriorate further if the
wholesale price inflation continues to remain in double digits, Aditya
Birla Group's senior economist Dr. Madhavan Kutty said on Thursday.
"MSMEs are badly hurt by rising commodity prices," he said,
against the backdrop of India's wholesale inflation, gauged by the
Wholesale Price Index, rose to 15.08 per cent in April 2022 from 14.55
percent in March - and has been in double digits for over a year now.
Kutty
was speaking at a panel discussion on 'Impact of commodity price
inflation on MSMEs' organized jointly by WTC Mumbai and All India
Association of Industries (AIAI).
"Prolonged periods of high
inflation will erode the profit margin of large corporate buyers, who
will in turn delay their payments to their MSME vendors," he said.
He
called upon banks and NBFCs to support MSMEs to navigate through this
challenging time and lenders must increase the credit flow to the sector
and shed their risk aversion.
At present, 57 per cent of private
banks' and 30 per cent of public sector banks' loan portfolio is linked
to external benchmarks. By linking their loan portfolio to external
benchmarks such as the RBI's repo rate, banks are compelled to transmit
policy rate hikes to their borrowers.
However, in these
challenging times, banks may refrain from passing on the RBI policy hike
to MSME borrowers, he said, calling upon state-run lenders to introduce
innovative derivative products to hedge interest rate risks and
thereby, support the MSME borrowers.
Citing an example of
commodity inflation, Advanced Material, Texport Syndicate India,
Director and CEO, and Indian Tech Textiles Association Vice Chairman
Avinash Misar said: "Indian textile industry is badly affected by rise
in cotton prices as 75 per cent of downstream industry produces cotton
garments and only 25 per cent produce man-made fibre garments."
Cotton
prices have risen three times more than the growth in general inflation
and MSMEs are unable to pass on this cost inflation as they have
entered into long term agreements with foreign buyers, he added.
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