Sluggish India economy, tight credit take toll on smaller firms

Thu Oct 3, 2013 6:11pm EDT
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By Archana Narayanan and Abhishek Vishnoi

MUMBAI (Reuters) - Sunil Malhotra's expansion plans had a sound logic; they would reduce his company's exposure to imports made more costly by the slump in the rupee this year to a record low. It was an investment to improve profitability.

But banks were unwilling to finance his plan, leaving him instead scrambling to find working capital let alone funds to invest in his firm, Hallmark Steel, a small company supplying the auto industry.

India's prolonged economic slide has affected many companies in India, but small and medium-sized firms have been hit the most because of their more limited access to finance.

Ratings agencies say the debt situation is the worst in a decade, which explains why banks are cautious about lending. That could lead to rising defaults and bankruptcies among small and medium-sized companies, which support a considerable part of the economy - about 45 percent of manufacturing and 40 percent of exports.

"I have gone to not one but three public sector banks for funds and they don't want to lend to any firm in the steel sector," said Malhotra, founder and chief executive of Hallmark Steel in the north India state of Rajasthan.

Malhotra had hoped to raise 500 million rupees ($8 million) to fund the purchase of a melting facility in Nagpur in western Maharashtra state, aimed at reducing Hallmark's reliance on imported raw materials.

"We wanted to get out of imports because it was hitting our margins because of dollar fluctuations," he said, adding that banks are asking for collateral equivalent to more than 130 percent of the loan size, from 80 percent previously.

DEBT DOOM   Continued...

An employee holds a steel rod as he works on the production line inside Hallmark steel factory in Bhiwadi in the desert Indian state of Rajasthan September 30, 2013. REUTERS/Adnan Abidi