1% interest rate hike cuts SME profits by 14%

A Crisil study on the financial performance of over 3,000 rated SMEs reveals that every percentage point increase in interest rates would lead to a decline of 14 per cent, on average, in the SMEs' profits.

The study covers 3,234 SMEs, with sales turnover ranging from Rs 1 crore (Rs 10 million) to Rs 500 crore (Rs 5 billion). It includes manufacturing, trading and service companies in 30 industries across 20 states.

The study found that half of the 2,200 small companies (with debt equity ratios below one) are less vulnerable to interest rate hikes than their more leveraged peers, as are others with a high return on capital employed of over 15 per cent (52 per cent of the sample).

The study brings out four other insights. First, enterprises in the service space are relatively insulated from the effect of interest rates, compared with SMEs in manufacturing and trading.

Second, industries like chemicals, metals and engineering are better placed, while food processing, textiles, paper and agriculture-related industries are more susceptible to interest rate changes.

Third, the financial performance of SMEs based in Maharashtra, Karnataka and Madhya Pradesh is less influenced by interest rates than that of SMEs in Haryana, Punjab, Andhra Pradesh and Himachal Pradesh.

Finally, larger SMEs are more sensitive to interest rates, with many of them having borrowed aggressively to finance capacity expansion programmes.