Interest rate hikes will hurt industries: traders

September 18, 2011 09:31 am | Updated 09:31 am IST - MADURAI:

With the Reserve Bank of India (RBI) on Friday raising key rates by 25 basis points, small industries and trade bodies have voiced concern that repeated hikes to combat inflation were threatening the very survival of thousands of micro, small and medium enterprises (MSME).

Tamil Nadu Small and Tiny Industries Association (TANSTIA) vice-president KR. Gnanasambandan told The Hindu that while big companies had the bargaining power to lower the interest rates or had other sources of credit such as approaching shareholders, small units were dependent almost solely on banks. While Indian MSMEs had to contend with ever-increasing interest rates, they still had to compete with small units from other countries, with lower interest rates, that were flooding their products in India.

Festival season

Compounding the problems was the rate hikes coinciding with the festival season when MSMEs had large orders and high inventories. “This will only lead to higher debt and hence more money would drain as payment of interests and affect profitability of units.”

Mr. Gnanasambandan said that industrial output had already declined in the second quarter to 3.9 per cent from nearly 5.5 per cent. This hike would only add to the problem. He requested the Apex bank to reconsider the move and find some other way to tackle inflation.

M.R. Rajendran, president of Kappalur Industrial Estate Manufacturers' Association, with around 300 small units employing 12,000 workers in its fold, said that interest rates had risen nearly 3.5 per cent since January and was now in the range of 15 to 16 per cent, a level that threatened the economic viability of small industries.

In a time of adverse economic conditions and acute labour shortage, government policies must be directed at helping small units. The government must devise a way to provide credit at lower interest rates to small industries.

Unemployment

Madurai District Tiny and Small Scale Industries Association (MADITSSIA) president N. Somasundaram said that unemployment would increase as industries would cut down costs by laying off workers. Coupled with increase in petrol prices, this move would hit the MSMEs very hard.

MADITSSIA vice-president P. Sitaraman said that the cost of finance had increased by nearly 45 per cent for MSME sector in recent months thereby reducing the profitability for small units, a move that could push many of them into losses.

Further, he also called for liberalising the norms for non-performing assets (NPA). At present, defaulting for three months would make the unit as NPA. He urged the RBI to consider increasing rates for loans for cars and other consumer goods.

Priority sectors such as agriculture and MSMEs should be able to get loans at interest rates around 11 per cent to ensure their economic viability.

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