According to India Ratings and Research (Ind-Ra), small and micro enterprises (SMEs) are facing high pressures on their working capital, mainly due to the increase in receivables and the absence of an increase similar creditors.
The increase in receivables is largely due to higher commodity prices – particularly key inputs such as steel, cement and crude derivatives – as well as late payments from large customers, a said the rating agency in a report.
In addition, the credit terms of major suppliers have not been extended.
Increase in SME receivables
A sustained increase in receivables in an unfavorable environment will limit the financial flexibility of SMEs, said Soumyajit Niyogi, Director, Ind-Ra.
According to the rating agency’s analysis of the top 1,500 large non-financial companies, their debts to SMEs as a proportion of total debts have increased by more than 1% in a sustained manner since fiscal year 2018.
The stretching of debt to SMEs was more pronounced from FY20 onwards as liquidity management became a controllable internal key among large corporations given the macroeconomic uncertainty, Niyogi said.
Ind-Ra analysis suggests that SME debts of the top 10 large companies (to total debt) as a percentage of total debts reached 1.24% in FY21 (0. 35% in FY18; 0.1% in FY12).
The upside was largest for the top 51-100 at 2.76% in FY21 compared to 0.12% in FY15. Although the amount of debt to SMEs is less than the total debt for large entities, it is still onerous for SMEs, the agency said.
Sectors affected by Covid
Sectoral data suggests that sectors that had faced significant financial difficulties due to the Covid-19 pandemic showed a higher degree of increase in debt to SMEs as a percentage of total debt than sectors less affected .
Sectors covered include consumer durables, capital goods, electrical, automotive and accessories.
Unlike a lag in debts to SMEs, the analysis suggests that the days payable on an aggregate basis have not changed. In some compartments, a moderate improvement is visible. That being said, Ind-Ra noted that the rise in debt is not generalized and is more of a concern for SMEs.
Sharp rise in input costs
The agency observed that although most SMEs operate on a fixed margin basis where costs are passed on to larger entities, inventory financing is necessary.
“Due to the sharp increase in input costs, working capital requirements will explode. If one follows the current trend of increasing claims, the situation will only exacerbate their challenges,” the analysis said.
The ECLGS has helped ease liquidity pressures
The agency added that the timely disbursement of the Emergency Line of Credit Guarantee Scheme (ECLGS) helped SMEs absorb such increased working capital needs in FY21 and FY22.
While extending the ECLGS may alleviate some of the stress, it would further burden their debt metrics. Additionally, not all entities would have unused limits available for additional borrowing, Niyogi said.
07 April 2022