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Double-digit wholesale inflation to depreciate working capital for MSMEs

Working capital of the Indian MSMEs would deteriorate further if the wholesale price inflation continues to remain in double digits, Aditya Birla Group's senior economist Dr. Madhavan Kutty said on Thursday.

"MSMEs are badly hurt by rising commodity prices," he also said, against the backdrop of India's wholesale inflation, gauged by the Wholesale Price Index, rose to 15.08 per cent in April 2022 from 14.55 percent in March - and has been in double digits for over a year now.

Kutty was speaking at a panel discussion on 'Impact of commodity price inflation on MSMEs' organized jointly by WTC Mumbai and All India Association of Industries (AIAI).

"Prolonged periods of high inflation will erode the profit margin of large corporate buyers, who will in turn delay their payments to their MSME vendors," he said.

He called upon banks and NBFCs to support MSMEs to navigate through this challenging time and lenders must increase the credit flow to the sector and shed their risk aversion.

At present, 57 per cent of private banks' and 30 per cent of public sector banks' loan portfolio is linked to external benchmarks. By linking their loan portfolio to external benchmarks such as the RBI's repo rate, banks are compelled to transmit policy rate hikes to their borrowers.

However, in these challenging times, banks may refrain from passing on the RBI policy hike to MSME borrowers, he said, calling upon state-run lenders to introduce innovative derivative products to hedge interest rate risks and thereby, support the MSME borrowers.

Citing an example of commodity inflation, Advanced Material, Texport Syndicate India, Director and CEO, and Indian Tech Textiles Association Vice Chairman Avinash Misar said: "Indian textile industry is badly affected by rise in cotton prices as 75 per cent of downstream industry produces cotton garments and only 25 per cent produce man-made fibre garments."

Cotton prices have risen three times more than the growth in general inflation and MSMEs are unable to pass on this cost inflation as they have entered into long term agreements with foreign buyers, he added.

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