Credit and Finance for MSMEs: The interest rate of advances taken by MSMEs has become expensive and is directly increasing the input cost of products being rolled out of MSME units, said Piara Lal Seth, President, Punjab Pradesh Beopar Mandal.
Credit and Finance for MSMEs: Amritsar’s MSMEs are going through a rough patch due to the interest rate hike following the repo rate increase by the Reserve Bank of India (RBI) recently, The Tribune reported. The RBI has raised the repo rate by 1.4 per cent since May this year. It had increased the rate by 0.4 per cent in May followed by 0.5 per cent each in June and August respectively, taking the policy repo rate to 5.40 per cent so far.
President of the local industry body Punjab Pradesh Beopar Mandal (PPBM), Piara Lal Seth said the hike is upsetting business calculations. The interest rate of advances taken by MSMEs has become expensive and is directly increasing the input cost of products being rolled out of MSME units, he said, according to the report. The MSME sector is still going through an existential crisis due to a hike in raw material, fuel cost, cargo cost, and other disruptions caused by the pandemic, Seth added. Moreover, the surge in food inflation has weakened the paying capacity of consumers.
“The government’s argument that the repo rate was increased to prevent rising inflation was micro, which ignores the interests of the MSMEs. Hence, its negative impact on the economy would be visible in the coming days,” the report cited Sunil Mehra of the PPBM as saying.
Mehra called for a special relief package by the government to support MSMEs from the impact of the interest rate hike as it would help in the advancement of industrial activity. He also sought implementation of the 2 per cent interest subsidy to the MSME sector to provide the latter with some relief as it offers maximum jobs to industrial labourers.
Importantly, the State Bank of India Economic Research Department in its Ecowrap report earlier this month authored by its Group Chief Economic Adviser Soumya Kanti Ghosh noted that with 39.2 per cent of the loans benchmarked to external benchmarks (EBR), the increase in repo rate of 1.4 per cent (140 basis points) will eventually increase interest cost for consumers — around Rs 42,500 crore on retail and MSME. This may have an impact on growth, it said.
The central bank increases the repo rate — the rate at which RBI lends money to commercial banks — to discourage the latter from borrowing in order to narrow the supply of money in the economy and control inflation.