Every 1 per cent increase in interest rates leads to a decline of 14 per cent, on average, in the profits of small and medium buseiness enterprises in the country, reveals a new study by ratings agency CRISIL.
According to the findings of a study on the financial performance of over 3,000 rated small and medium enterprises (SMEs) released today, CRISIL said one-fifth of the enterprises evaluated could face erosion of 25 per cent or more in their pre-tax profits.
The study covers 3,234 SMEs, with sales turnover ranging from Rs1 crore to Rs500 crore. It includes manufacturing, trading, and service companies in 30 industries across 20 states.
The study draws on CRISIL's understanding of the sector, and the insights gained while assessing the credit risk profiles of over 17,500 SMEs.
According to Roopa Kudva, MD and CEO, CRISIL, "This is the first time that deep analytical insights on small companies are being made available in India; CRISIL's effort will promote a better understanding of the SME sector."
In the study sample, 2,200 companies were very small with sales of less than Rs20 crore. Over half of these small companies had low levels of debt (debt-equity ratio below 1), making them less vulnerable to interest rate hikes than their more leveraged peers.