Every percentage int hike reduces SME profits 14 pc: CRISIL

Mumbai, Jan 31 (PTI) Every one per cent increase ininterest rates would lead to an average decline of 14 per centin SMEs'' profits, a report released by CRISIL said.

According to the report, the decline in profits couldbe even 25 per cent or more in case of some SMEs.

"One-fifth of the enterprises evaluated could faceerosion of 25 per cent or more in their pre-tax profit levels,the report released by CRISIL said.

The CRISIL study covered 3,234 SMEs with salesturnover ranging from Rs 1-crore to Rs 500-crore and includedmanufacturing, trading and service companies in 30 industriesacross 20 states, a press release issued here stated.

The study found that every one per cent increase ininterest rate would result in an average decline of 14 percent in the profits of SMEs.

The study draws heavily on CRISIL''s deep understandingof the sector and the insights gained while assessing thecredit risk profiles of over 17,500 SMEs, it added.

According to CRISIL''s Managing Director and CEO, RoopaKudva, "this is the first time that deep analytical insightson small companies are being made available in India; CRISIL�seffort will promote a better understanding of the SME sector."

In the study sample, 2,200 companies were very smallwith sales of less than Rs 20-crore. Over half of these smallcompanies had low levels of debt (debt-equity ratio below 1),making them less vulnerable to interest rate hikes than theirmore leveraged peers, the release said. .

Similarly, SMEs that are more capital-efficient, as measured by Return on Capital Employed (RoCE), are lessvulnerable to an interest rate hike. 52 per cent of thecompanies in the sample have a high RoCE (exceeding 15 percent), and the impact of interest rate increases on thesecompanies would be minimal, the report said.

Commenting on the impact of interest rates on SMEprofits, CRISIL''s Director, SME Ratings, Ramraj Pai, said,"CRISIL''s study reveals that enterprises using capitalefficiently and deploying debt sparingly, would be the leastaffected".

The study also found that the enterprises in theservice space are relatively insulated from the effect ofinterest rates, compared with those in the manufacturing andtrading sectors. While, industries like chemicals, metals andengineering are better placed while food processing, textiles,paper and agriculture-related industries are more susceptibleto interest rates.

According to the study, the financial performance ofSMEs based in Maharashtra, Karnataka and Madhya Pradesh isless influenced by interest rates than that of SMEs based inHaryana, Punjab, Andhra Pradesh and Himachal Pradesh.

The study suggests that larger SMEs are more sensitiveto interest rates, with many of them having borrowedaggressively to finance capacity expansion programmes.

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