RBI rate cut positive, but may have little for SMEs


Terming the Reserve Bank of India’s (RBI) move to cut the short-term lending rate by 25 bps to 6.25% from 6.50% as positive, experts argue it may have little or no impact for SMEs in the country. “The first significant policy announcement since assuming responsibility as the Governor of the RBI, and the outcome of […]


RBITerming the Reserve Bank of India’s (RBI) move to cut the short-term lending rate by 25 bps to 6.25% from 6.50% as positive, experts argue it may have little or no impact for SMEs in the country.

“The first significant policy announcement since assuming responsibility as the Governor of the RBI, and the outcome of the deliberations of the first Monetary Policy Committee meeting, is a reduction in the policy repo rate by 25 basis points to 6.25%. With this rate reduction, the Reserve Bank has brought down the repo rate by 175 basis points January 2015. Along with the reduction in the policy rate, the RBI has maintained an easy liquidity stance”, said BMR & Associates LLP, Chief Mentor & Partner, Bobby Parikh.

Parikh adds both these factors, combined with the marginal cost based lending rate regime for banks, ought to translate into reduced costs of borrowings for companies (including SMEs) and individuals However, previous rate cuts by the central bank have not been passed on to the consumers and negative growth in credit to SMEs is not merely limited to a high interest rate regime.

“On a macro perspective, actual transmission of rate cuts needs to happen to the borrowers. We would like to see whatever growth stimulus is made available, to be transmitted. According to the data that we have seen, that transmission has not happened completely”, says Trifecta Capital, Managing Partner, Rahul Khanna.

According to Khanna, there are not a lot of startups that have taken debt. “The reason that a firm like Trifecta exist is because banks do not lend to startups. The whole premise of a venture debt is to be able to fill a gap which banks are not able to fill. So, whether interest rates move up or down by half a percent, does not change bank’s lending to startups. It is not a question of the cost of funds, but a question of understanding and underwriting which are not asset heavy. Banks are traditionally comfortable lending against collateral or a sustained track record of profitability and most of the startups do not have collateral and because they are growing, are not necessarily profitable. So, interest rates have no bearing on whether starups get access to capital or not”, says Khanna.

Even SMEs are gradually moving away from formal financial institutions and banks as alternative lending institutions are becoming popular. Most such alternative lending platforms have minimal paperwork and most do not charge any collateral.

“We welcome the reduction in the rate cut. Since large number of our borrowers are micro-SMEs or self-employed the increased liquidity would definitely revitalize this key segment and boost the economy. As the leading alternative lending platform, we have been witnessing higher lender interest over the last quarter, which is a pointer to increased supply. Therefore, we were anticipating a rate cut. Improvement in the liquidity conditions would further help in boosting the credit scenario of the economy,” says Faircent.com, Founder & CEO Rajat Gandhi.

According to RBI, compared to August 2015, gross bank credit to Micro and Small Enterprises in August 2016 contracted 3.7%. Compared to March, 2016, the levels have contracted even more alarmingly by 4.6%. Interestingly bank credit in August 2015 when compared to August 2014 saw a growth of 6%.

Source: The Economic Times

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