Many of the consumer product manufacturers in India are said to be staring at the possibility of a series of payment defaults by their SME (small and medium enterprises) customers and traders who are hit by a serious liquidity crunch in the domestic market.
SME customers and traders have been struggling to access funds due to the prevailing tight liquidity position in the domestic market, which could set off a payment default crisis unless the liquidity situation improves immediately, according to industry sources in India.
The problem is worse for manufacturers of consumer durable products such as paints, electronics goods and gadgets, white goods, where discretionary spending by consumers are the highest, leading to increasing inventory pile-ups at the traders’ end.
The build-up of a potential payment defaults by SMEs and traders in the consumer industry sector is happening at a time when a crucial board meeting of Indian central bank, RBI, is taking place this week to deliberate on several contentious related to regulations and lending-related operational issues, with measures to ease liquidity crunch being on top of it.
There has been a major tussle going on between the Indian finance ministry and the Reserve Bank of India (RBI) on a long set of regulatory and operational issues related to India’s central bank for some time now, which is expected to make this week's RBI board meeting a stormy affair.
Stepping up of liquidity flow to the NBFC (non-banking financial companies) sector and relaxation in lending norms clamped on several public sector banks which have high levels of NPAs (non-performing assets) on an urgent basis are on top of the demand list being pushed by the Indian finance ministry officials.
“With the risk of payment defaults by our SME customers and traders is increasing with each passing day, we are in a serious dilemma as to whether to continue with our supplies to them,” R Guha, chief financial officer (CFO) of Akzo Nobel India, told Arabian Business.
Akzo Nobel India, the Indian arm of leading multinational paint and industrial coatings solutions company, supplies industrial paints and other products to companies in the SME sector across India.
Senior executives in some of the leading white goods and electronic appliances manufacturers also said their traders are also struggling to arrange funds for payments because of the liquidity crunch in the market.
“Unfortunately, this is happening at a time when the on-going festival season and the approaching new year season when the maximum sales happen for us,” a senior executive at an electronics manufacturing company, who did not wish to be identified, told Arabian Business.
Industry sources said some of the big players in the SME sector are making efforts to arrange funds from certain overseas markets, including the Middle East market, to tide over the current situation.
However, the efforts of many of these companies are yet to yield results, as overseas borrowings have now become more costly for Indian borrowers, especially for companies in the SME sector who do not have high credit ratings. This is due to the question mark over the direction of rupee exchange value in the short-term and the overall uncertainty over India’s economic and political fronts.
Consumer product manufacturers supply goods to their SME customers on a 60-day credit basis and to their retail traders on a 15-30 day credit basis.
Industry sources said their traders have been facing liquidity problems for the last 2-3 months now and if the situation does not get resolved immediately, it could lead to a crisis situation with several cases of payment defaults.For all the latest banking and finance news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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