SMEs near bankruptcy after interest rate hike
The sudden interest rate hike excessively by the Central Bank would hit COVID-19 affected small and medium enterprises ( SMEs) hard compelling them to declare bankruptcy under the present economic downturn, SME associations warned.
Banks and financial institutions have already activated all types of recovery actions, including parate execution and forced repossession of leased assets, they complained.
Around 1.3 million SMEs with 2.2 million employees contributing to more than 50 per cent of the country’s GDP are just surviving at present with the concessionary financial relief schemes and extensions of debt moratoriums granted by the Central Bank ( CB).
At a time when these business enterprises face difficulties in servicing their loans taken from banks and finance companies and on expiry of the moratorium, the CB raised lending rates by 7 per cent recently.
The aim was to "stabilise the exchange rate" as the rupee depreciated by over 35 per cent in a month and tackle rising inflation due to shortages of essential commodities in economic disaster, CB sources revealed.
President of the National Trade Protection Council ( NTPC) Mahendra Perera told the Business Times that SME’s used to pay interest rates for their borrowings from banks and financial institutions ranging from 14-18-20 per cent per annum and this will increase to 21- 25- 27 per cent or more with the new increase.
These business enterprises are currently facing liquidity issues due to loss of revenue and difficulties in the importation of raw material in dollar crisis and rupee depreciation along with the decline in cash flow, loss of sales, he added.
The interest rate hike will lead to bankruptcy of SME’s as most of such enterprises have been closed down causing loss of jobs of workers.
He urged the CB to issue a directive to banks and financial institutions not to increase interest of their loans and extend the
March 31 date of expiry of moratoriums considering present hardships faced by them.
When interest rates increase to a very high level too quickly, it can cause a chain reaction that affects the domestic economy creating a recession in some cases, economists said adding that this action was taken too late.
If interest rates are raised too quickly it is more of a risk than keeping it low for prolonged periods and the economy can grind to a halt, one economist said.
The problem of access to finance and the cost of borrowing are acute, he pointed out emphasising that small and medium scale firms with overdrafts will have higher costs because they must now pay more interest.