Mumbai: A slowing economy and the growing reluctance of banks to lend money have hit small and medium enterprises (SMEs) hard in Asia’s third largest economy.
The growth in the sales of SME units has drastically declined in the past four quarters and their net profit has contracted, according to data compiled by Mint. Net profits of 2,739 listed companies, with turnover between Rs.1 crore and Rs.500 crore, dropped for five consecutive quarters while their sales growth has been progressively slowing. In the September quarter, their sales grew at 1.94%, but net profit contracted 13.26%.
Even these numbers do not reflect the real picture as hundreds of small units are not listed and they are suffering more.
Rs.500 crore and Rs.1,000 crore have seen growth, but their net profit grew only in September after four quarters of contraction.
Large companies, with sales over Rs. 1,000 crore, have been able to maintain growth in both sales and net profit at least in the past three quarters, the data showed. The net sales of these companies totalled over Rs. 4 trillion in the September quarter, registering a growth of 8.19% year-on-year, while their net profit and operating profit grew 36.12% and 23.32%, respectively.
The drop in sales and net profits of SMEs has coincided with drying up of bank funds. According to data from the Reserve Bank of India (RBI), growth in bank loans to micro and small units slowed to 7% in the 12 months ended September 2012 against 13.7% in the corresponding period last year. Lending to medium-sized companies has fallen even more, registering a mere 0.6% growth in the 12 months ended September 2012, compared with 31.5% in the year-ago period.
Loans to small firms have virtually come to a halt in the last six months. Bank lending to micro and small companies grew 0.3% in the six months ended 21 September. During this period, loan growth to medium-size firms actually declined 4.3%.
Loans to large corporations, however, grew 3.6% between April and September.
As on 21 September 2012, Indian banks have loaned Rs.2.6 trillion to micro and small units, and Rs.1.9 trillion to medium-size companies, while the exposure to large corporations is about Rs.15.5 trillion.
According to a representative of an industry body for small businesses, a severe fund shortage has crippled the business of small units and lacklustre demand for products could force at least six million small units to shut operations in the next few months.
“Nearly 20% of the small units in India won’t survive beyond the next few months unless corrective measures are taken both by the government and the banking sector,” said Chandrakant Salunkhe, president of Small and Medium Business Development Chamber of India (SME Chamber of India).
India has around 30 million small industrial units.
“SMEs are in deep trouble since banks have practically stopped funding these units. The government has reduced the procurement from SMEs; exports are severely hit; and large corporations are delaying payments to small vendors by many months,” Salunkhe said.
A surge in bad loans from small companies has prompted most Indian banks to choke funding to these firms.
One of the key reasons behind the inability of small units to repay bank loans is high interest cost. Typically, banks charge 14% or more to small units, much higher than their base rate or the minimum lending rate. For poorly rated companies, the interest cost will be even higher.
State Bank of India (SBI), the nation’s largest lender, has seen its net non-performing assets (NPAs) in the SME segment rising to 4.94% as on 30 September 2012 from 3.69% in the year-ago period, and those in the mid-size segment to 3.96% from 2.83%.
NPAs arising from loans to large corporations have declined to 0.11% from 0.62% in the same period last year.
A few other state-run banks, including Canara Bank and Central Bank, too, have seen a rise in bad loans arising from small- and medium-size firms.
“We will be cautious in taking any further exposure to small units as the NPAs are way too high from the segment, whereas that from large companies are practically nil,” a senior official with SBI said. He did not want to be named as he is not authorized to talk to the media.
The official, however, attributed the slowdown in credit growth to not just worries about bad loans, but also inadequate demand from small companies. “How will you lend to a company when there is no demand? Unlike larger companies, financial resources are limited for small units in India, which has made survival difficult for these firms in times of an economic downturn,” the official said.
Indeed, according to Vaibhav Agarwal, a research analyst at Angel Broking Ltd, bank lending to small companies will look up only when the economic prospects of these firms do.
“Currently, it is a combination of zooming NPAs and slowing demand that have forced most of the state-run banks to reduce lending to such firms. The level of bad loans are high with banks like SBI,” added Agarwal.
India’s economic growth slowed to a nine-year low of 5.3% in the March quarter before inching up marginally to 5.5% in the June quarter. It has been battered by significant slowdown in major global economies and the absence of reforms to stimulate both foreign and local investment. Mirroring the slowing growth, the country’s factory output has contracted since March except in the months of May and August.
Loss-making small industrial units are also fighting an exodus of employees, SME Chamber of India’s Salunkhe said. “Many employees from small industrial units have moved to work under the Mahatma Gandhi National Rural Employment Guarantee Act as it is yielding somewhat similar compensation,” he said.
The scheme guarantees 100 days of employment and a minimum wage of Rs.100 a day to one person in every poor rural household.
Increasing imports of engineering machinery and equipment, and raw materials from China and Korea, too, have killed the demand for products of local units, Salunkhe added.
India’s imports have steadily increased over the past months, while its exports have stagnated, widening the trade deficit, which stood at $20.96 billion (around Rs.1.2 trillion today) as of 31 October.