Pharmaceutical sector’s small and medium enterprises (SMEs) have been badly impacted by the recent move of the Reserve Bank of India(RBI) to hike the short-term lending and borrowing rates by 50 basis points (bps).

The move by the RBI will make corporate loans expensive. It is for the third time in three months that such a step has been taken to subdue high inflation. The increase of 0.50 per cent, short-term lending (repo) rate has been hiked to 8 percent and the short-term borrowing (reverse repo) rate has also been increased to 7 per cent.

Now the banks have opted to either to increase the tenure of repayment or increase interest rates. Interest rate hike will crimp growth.

The hike of repo rate of 0.50 per cent is 11th time in the last 16 months. This will lead to increase in base rate of all the banks and the working capital borrowing costs will accordingly rise higher. It will affect the margins and growth of the pharmaceutical industry as well. Since the term loans will also become costlier, the pharmaceutical companies may have to hold back the expansion plans, stated Badarinath, vice president, Finance, Micro Labs Ltd.

According to Jatish N Seth, director Srushti Pharmaceuticals and member, managing committee, Karnataka Drugs and Pharmaceutical Manufacturers Association (KDPMA), the RBI move is a huge blow which will cascade on production costs and working capital. It puts a stop on new projects because borrowing is now unaffordable for SMEs.

“The hike interest rates will erode profits of medium companies and for  small industries which are known for relatively weak financials would  find it difficult to repay, stated Kaushik Desai, chairman, Industrial Pharmacy Division, Indian Pharmaceutical Association.

“The interest rate increase is bad news for companies, such as ours, who are financed by debt. The banks to keep their spread intact, always pass on the increase to their customers. Since we have existing loans there is  absolutely no choice in the matter. In the past 16 months our cost of money has increased by over 5 per cent. SMEs cannot absorb such a hit and drive many companies to bankruptcy, with a knock on employment, Non Performing Assets (NPAs) for banks and further increase burden on the common man. These increases have now reached a point where they are not smart policy any more,” stated Ajay Bharadwaj, chief executive officer & founder Anthem Biosciences.

A section of officials from the State Bank of Mysore and Canara Bank stated higher interest rates would make money costlier and limits the ability of companies to purchase or invest thereby reducing growth.

There are around 10,000 pharma units in the country with over 90 per cent in the SME segment. According to a pharma industry report 2011, the size of the industry is $10.04 billion with value wise growth of over 20.4 per cent over the previous year’s corresponding period on Moving Annual Total (MAT) basis.