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Rate hike playing havoc with SMEs: FISME
The Reserve Bank of India (RBI) hiked the repo rate under the liquidity adjustment facility (the rate at which the RBI lends to scheduled commercial banks) by 25 basis points on October 25, 2011, as part of monetary policy measures accompanying the Second Quarter Review of Monetary Policy for 2011-12. This is the 13th such increase in the basic interest rate since March, 2010. This means the interest rate has been raised by a whopping 375 basis points in the last 20 months or so. Given the already weak economic scenario, the latest rate hike was perhaps the last nail in the coffin. FISME, India’s largest MSME organization, had to react and we did.
In our press release Mr V.K. Agarwal, President, FISME said “The indecisiveness of the central government on supply side reforms coupled with its fiscal profligacy has rendered the RBI’s interest-rate hikes more or less ineffective in containing inflation.”
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Under the circumstances, FISME would like to bring to the RBI’s notice that out of the top 200 items produced by MSMEs, the demand for nearly 60 per cent of these items is critically dependent on the healthy growth of three sectors – buildings and construction, transportation, and the white goods sector,” he said.
While the rate hikes have adversely impacted investment decisions in all three areas and thereby the top line growth of MSMEs producing items meant for final consumption in these sectors, the increased cost of credit has become quite unbearable for many MSMEs as this is also eroding their margins and rapidly pushing them towards insolvency.
In view of this situation, and the fact that interest rate hikes have adversely impacted investment in housing, automobiles and white goods due to a sharp weakening of demand as higher financing costs are forcing consumers to defer their purchase decisions, FISME would like the RBI to consider an interest subvention scheme for the MSME sector so that they can survive even as RBI continues to maintain its anti-inflationary stance.
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Read our press release here. Read media coverage on our stand here.
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