New Delhi: Father-son partners Vishwamitra and Sunil Bahl’s auto parts firm, run out of a 836 sq.meter shed in west Delhi with 25 workers, forged success out of India’s economic boom as low inflation and plentiful and inexpensive bank credit spurred sales.
Their unit Auto Steel Ltd, which makes leaf springs used for the suspension in automobiles, benefited from growing demand for heavy transport trucks and farm trailers, supplying to markets from Goa to Tamil Nadu. Last year, sales were a healthy Rs3 crore.
Difficult times: An educational wooden toy factory in Mayapuri, New Delhi. Economic headwinds are turning banks into reluctant lenders, based on a perception that small-scale industries are too risky to lend to. Photograph: Ramesh Pathania / Mint
But, the good times are already turning into a fading memory as rising inflation and interest rates, and higher raw material and fuel costs crimp demand, causing the economy to slow, and take their toll on small, family-run businesses such as Auto Steel.
Vishwamitra Bahl, 82, who started the company four decades ago and continues to oversee administration, and Sunil Bahl, 48, who manages the shop floor and marketing, say they are already struggling to retain customers.
“First, it’s always difficult to convince banks to fund small-scale industries. Then, our customers always want cheap products,” says the junior Bahl, who expects at least 8% dip in profit this year and recently started travelling out of the city once a month in search of orders. “We can’t pass on the costs to our customers because the competition is too great.”
Inflation has surged to a 13-year high of 12.01%, prompting the Reserve Bank of India (RBI) to raise its benchmark lending rate to the most in seven years and reduce money from the banking system to cool consumer demand. The central bank has pared its economic growth forecast for fiscal year 2009 to 8% from 8-8.5% in April.
Small-scale firms are reeling. According to the Associated Chambers of Commerce and Industry of India (Assocham) the small-scale industry sector turned “vulnerable’ from the first quarter, with both manufacturing and hiring slipping by 10% and 7%, respectively. Expansion has virtually come to a standstill, some experts say.
“The slowdown in the sector is more psychological and the negative impact is likely to be felt in the days to come,” said Bikky Khosla, chairman of the small and medium enterprises’ (SMEs) committee at Assocham and chief executive of the country’s largest business-to-business (B2B) portal, Tradeindia.com, devoted to small and medium business.
India is home to 21.8 million SMEs that are either family-owned or run by close-knit partnerships.
They produce a sweeping range of 8,000 products—from rubber slippers and furniture to paints and light fixtures, components for autos and home appliances to parts for defence tools and satellites.
SMEs contribute 6% of gross domestic product. They make up 39% of the country’s manufacturing output.
The small-scale industry is a so-called priority lending category for banks and are mandated by the government to channel at least 40% of credit to small companies, agriculture, professionals and self-employed individuals, and retail traders.
But, the economic headwinds are turning banks into reluctant lenders, based on a perception that SMEs are too risky to bet on.
“Banks are less eager to lend than they were a year ago,”says Neeraj Kedia, chief executive at Chakradhar Chemicals Pvt. Ltd, a medium-sized 13,000-tonne capacity micronutrient fertilizer company based in Uttar Pradesh.
Kedia says his Rs23 crore company, which employs about 70 people, has been hit by the rising cost of raw material and transport, while salary expenses have been increasing year-on-year at 16% .
Prices of sulphur, the main input in making a sulphate-based fertilizer he produces, has risen to $850 (Rs36,295) a tonne this month from $250 a tonne a year ago; transport costs have doubled in 12 months.
“While our product prices have gone up by 20%, we have to sacrifice 5% of our profits to stay competitive,” he said.
Banks are the main source of funding, with alternative investment sources virtually non-existent for SMEs, possibly because of a lack of transparency in accounting among entrepreneurs. According to government data, only 15% of these units are registered.
“When the economy slows down, it can impact SMEs. So far, we have not seen slippages taking place,” said M.V. Nair, chairman and managing director of Union Bank of India. He said the bank registered a 40% increase in lending the sector in the last one year.
Still, growth in gross bank credit to the small-scale sector halved between 1996 and 2007 to 6.34% from 12.66%, according to RBI data.