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CRISIL's analysis of 3,000 micro small and medium enterprises (MSMEs) revealed that enterprises resorted to personal funding sources, such as equity infusion by the management and unsecured loans from acquaintances, because of the unavailability of easy access to bank funding and in a bid to ease the pressure on profit margin, resulting from rising inflation in 2010-11.
Rising inflation and the high interest rate regime in 2010-11 constrained the profit margin and working capital management of MSMEs in India, particularly start-up ventures that have a restricted corpus.
In 2010-11, inflation led to an increase in the cost of inputs, while the constantly rising cash reserve ratio was soaking up liquidity from the banking sector. Consequently, there was a spike in the demand for short-term funds, which were not easily available. Accessing bank finances in such a scenario would imply higher interest costs and a squeeze on the profit margin.
Crisil's study shows that because of the difficulties in accessing bank funding and the need to ease the pressure on profit margin, MSMEs dipped into their personal funding sources, such as equity infusion by the management and unsecured loans from family and friends.
The average net sales of these enterprises recorded a growth of 29% in 2010-11 to R275.23 million from R214.05 million in 2009-10 (chart 1). This growth was partly fuelled by the inflationary pressure, as the cost of goods increased due to an increase in major input costs, such as raw material and wages.
The average raw material cost increased by 31% to R186.44 million in 2010-11 (chart 2) from R141.87 million in 2009-10, more than the growth in net sales during this period, as enterprises were unable to pass on the increase in raw material cost to their customers.
The average employee cost during this period also registered a 27% growth (chart 3), to R10.13 million in 2010-11 from R7.98 million in 2009-10, as most enterprises had to increase wages in 2010-11 to retain employees. The increase in raw material and employee costs constrained operating margin, which showed a decline of 13 basis points. The average operating margin of enterprises reduced to 8.81% in 2010-11 from 8.94% in 2009-10 (chart 4) owing to the inability of enterprises to pass on the input cost entirely to end-users.