46% of small loans under stress, says report
Updated: Apr 16, 2014 04:11:54pm
Mumbai, Apr 16 (KNN) As much as 46 percent of the bank loans given to the small businesses with less than Rs 300 crore revenues, have come under the risk of becoming non-performing assets, according to a report of India Ratings.
"As much as 46.3 percent of bank loans extended to listed small and medium companies (SMEs) are in significant stress ... At least one out of four such companies may face a challenge in servicing even interest," said India Ratings.
The agency said it is keeping a negative outlook for SMEs in the chemical, textiles, power, steel and construction sectors, while real estate has a stable outlook.
It said unless the working capital days of large corporates come down below 50, the working capital cycle of SMEs is unlikely to improve.
Further, it warned that the median revenue of SMEs is unlikely to improve in the next 12-18 months.
The revenue growth (median) of small companies has fallen from FY10 and has been in low single digits since FY11. But the revenue growth for large companies (represented in BSE 500) and medium companies has tapered off FY13 onwards.
Smaller companies have a lower bargaining power as compared to the bigger ones, it said, pointing to the gap of 10-12 per cent in the pre-tax margins between the two groups.
The report quoting a senior KPMG India official said that this phenomenon could be attributed to economic slowdown and high interest rate regime. Small and mid-sized companies may take loans towards infrastructure development. However, if that is not achieved owing to general economic conditions, it becomes extremely difficult for them to service the debt, he said.
According to him banks in India mostly give mortgage loans while instances of cash flow based loans are rare. Significantly, when loans are given, the repayment capacity on the basis of viability of the business model is not given as high weightage as the mortgage value.
However, SMEs’ ability to revamp and rearrange their business model is limited. A senior director of India Ratings and Research said SMEs are the first casualty in the downturn and their revenue growth slipped into the single-digit since FY11, while the same happened for large corporates only from FY13.
The report said the reduction in the working capital days of large corporates was essential for conditions at SMEs to improve.
It would require the economic activity to reach the level last observed in FY11-FY12, which is unlikely to happen in the next 12 to 18 months. (KNN/ST)
"As much as 46.3 percent of bank loans extended to listed small and medium companies (SMEs) are in significant stress ... At least one out of four such companies may face a challenge in servicing even interest," said India Ratings.
The agency said it is keeping a negative outlook for SMEs in the chemical, textiles, power, steel and construction sectors, while real estate has a stable outlook.
It said unless the working capital days of large corporates come down below 50, the working capital cycle of SMEs is unlikely to improve.
Further, it warned that the median revenue of SMEs is unlikely to improve in the next 12-18 months.
The revenue growth (median) of small companies has fallen from FY10 and has been in low single digits since FY11. But the revenue growth for large companies (represented in BSE 500) and medium companies has tapered off FY13 onwards.
Smaller companies have a lower bargaining power as compared to the bigger ones, it said, pointing to the gap of 10-12 per cent in the pre-tax margins between the two groups.
The report quoting a senior KPMG India official said that this phenomenon could be attributed to economic slowdown and high interest rate regime. Small and mid-sized companies may take loans towards infrastructure development. However, if that is not achieved owing to general economic conditions, it becomes extremely difficult for them to service the debt, he said.
According to him banks in India mostly give mortgage loans while instances of cash flow based loans are rare. Significantly, when loans are given, the repayment capacity on the basis of viability of the business model is not given as high weightage as the mortgage value.
However, SMEs’ ability to revamp and rearrange their business model is limited. A senior director of India Ratings and Research said SMEs are the first casualty in the downturn and their revenue growth slipped into the single-digit since FY11, while the same happened for large corporates only from FY13.
The report said the reduction in the working capital days of large corporates was essential for conditions at SMEs to improve.
It would require the economic activity to reach the level last observed in FY11-FY12, which is unlikely to happen in the next 12 to 18 months. (KNN/ST)
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