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MUMBAI : The real impact of interest rate hikes on India’s small businesses will be visible only by the end of this year when restructured loans and some fresh credit taken under a sovereign-backed programme come up for repayment, two senior bankers said.

These bankers, one of whom spoke on condition of anonymity, said that so far, the micro, small and medium enterprises (MSME) sector has been able to repay their loans on time with minimal delays. However, consecutive rate increases will definitely impact their ability to repay in the coming months, they said.

It is estimated that a large portion of the fresh loans under the Emergency Credit Line Guarantee Scheme (ECLGS), introduced in May 2020, also went towards servicing interest cost. Some ECLGS repayments have already started from last September and the second phase will start by this year-end.

“ECLGS loans were taken by small businesses hit hard by the pandemic and since there was a moratorium of 12 months, the real test of their recovery will be seen only after repayments begin. For such loans where repayments have begun from September, our experience has not been very discouraging and while there are delinquencies, they are under control, so far," said a senior banker.

The RBI has already raised the repo by a total of 90 bps in May and June and economists expect the central bank to hike the rate further to stem rising inflation. For small businesses, any increase in the repo rate will immediately translate into higher borrowing costs as their loans are linked to external benchmarks. Since banks use marginal cost of funds-based lending rate (MCLR), an internal benchmark, for loans to large corporates, transmission is relatively slow.

A little over 69% of all floating rate small business loans were linked to an external benchmark as of December, as against just 20.4% for large industries, showed data from RBI. “While some of the stressed small businesses have been able to overcome the pandemic-induced cashflow disruption, the rest have not. Last year, a large share of credit growth to small businesses was affected by low interest rates of 6.5-7% and now, when the rates have gone up by 90 bps with more to follow, it will dampen their sentiments," said the banker cited above.

While the government and RBI initiatives seem to have cushioned small businesses, not all are out of the woods just yet. According to an analysis by Bank of Baroda, a sample of 303 micro-enterprises saw negative growth in sales for the third consecutive year in FY22. This shows that even before the pandemic, the micro sector was not doing well which got exacerbated in FY21. “MSMEs who faced severe stress because of covid-19 were allowed to restructure their loans and were also given fresh credit under the ECLGS scheme of the government. Some of these small businesses were already vulnerable and the rate hikes could further dent their capacity to repay on time," said Suresh Khatanhar, deputy managing director, IDBI Bank.

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