Crisil: 53% SMEs prefer own funds over bank funding

Rating agency Crisil on Tuesday said a large majority of SME promoters - as many as 53 percent - continue to use their own funds to tide over inflationary pressure as getting bank funds are not without difficulties for them.

"Easy access to bank funds has always been difficult for of small and medium enterprises (SMEs)...Support from the lending institutions would have provided additional fillip to the sector," said Sachin Nigam, Senior Director for SME ratings, Crisil in a research note.

After a survey of over 3,000 SMEs on their funding patterns, it has found that 53 percent of them met their funding needs through promoters' funds and personal loans in FY11, Nigam said quoting a survey finding.

The survey revealed that while revenue of the SMEs increased 29 percent last fiscal, raw material costs rose 31 percent while operating margins marginally declined (1 percent), showing their inability to pass on the inflation pressures to their customers, he said.

In the same fiscal, equity capital bought by SME promoters increased 29 percent, while loans from promoters' family and friends were up 24 percent, indicating that funding requirements were met through promoters' funds than through bank borrowings.

The Crisil study said companies in the engineering and capital goods, textiles and chemicals, which have high input costs, are most susceptible to inflationary pressures.

However, notably, country's largest lender State Bank of India recently announced an up to 3.50 percent reduction in interest rates for the SMEs.