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2011-08-05

RBI's rate hike impacts SMEs

A continuous rate hike strategy by RBI has impacted SMES

Continuous policy rate hikes by Reserve Bank of India (RBI) consecutively for twelve times have thrown many small and medium enterprises (SMEs) out of business and others are on the brink of being out of business, an industry body survey revealed.

This is a matter of serious concern. RBI's continued strategy of increasing lending rates without attempting to address the issues of high credit cost to the SME sector may lead to more non-performing assets (NPAs) of banks, as high raw-material cost and low margins would put pressure on SMEs, leading to their inability to repay loans, said survey conducted by ASSOCHAM.

"...increased cost of inputs may affect their (SMEs) ability to service loans/interest commitments and may be a major factor for increased NPAs of banks," it said.

ASSOCHAM said that the continued increased fuel prices, ever increase in lending rates are the worst hit and could be heading for a serious trouble.

SMEs have shared that there has been a decline of around 15 percent market share of SMEs, 20 percent in their profit margins and 24 percent reduction in total production capacity, which are serious subjects.

Therefore, ASSOCHAM survey has revealed the serious undercurrent of the financial position and its impact on the rising cost of funds, consequent upon undeterred hike in key policy rates of RBI, affecting one of the most important sectors of the economy—the SMEs.

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