If you have been following Stock Market, you would not have missed the unmitigated fall of PSU banks. All the banks have posted huge loses this quarter and coupled with action of Vijay Mallya’s and Subrato Roy of the world, there are negative implications in the world of business and we will in this blog analyze its effect on Start-Ups and Small Business:
1- Funds are prime requirement for any business and the access to Cheap Loan is a major factor for growth of a company. In India the Rate of Interest is approximate 12% to 14% (For secured Loan) which is comparatively higher than from China, UK, US etc (where the loan ranges from 4% to 8%). This given a disadvantage to Private Limited company/LLP Incorporation in India. And for new Business Registration the interest rate is even higher which makes them less competitive
2- The more default and NPA by Companies, higher would be interest rates. Bank decides rate of interest as follows: Take Rate of Interest on which bank gets the money (mostly it will be the Fixed Deposit rate). Lets take it as 8%. Then they add their profit margin to it which is in range of 2-3%. Lets take it as 2%. After adding cost of capital and profit margin, the rate of interest is 10% (8% + 2%). After that they add the risk factor which is the percentage of loan which gets defaulted. (If a Bank gives Rs 100 as loan and out of which Rs 5 loan becomes Non Performing than risk factor will be 5%). Higher the risk factor, higher would be rate of interest for you.
3- There is a direct co-relation (if not causation) between Debt Funding and Equity Funding. If Debt funding becomes costly, equity funding gets more difficult to get which affects New Business Registration and Company Formation in India also suffers
4- RBI has advised banks to have 2 separate accounts (1 for Equity Infusion in sick companies and 1 for Funding). This was Risk will reduce and interest rates will come down
5- Start-Ups and Small Business are most hard pressed for funds and NBFCs/Private Lenders demands rate as they wish to. This makes most of Start-Ups and NBFCs close within 3 years because of lack of fund.
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