Impact of Rising Interest Rates On Entrepreneurship - A case Study of an SME Entrepreneur

In a new political environment, where everyone would like to believe that we have won the political battle and moving towards stability, the economic parameters in general and ‘stable interest rates’ in particular must be managed prudently by all the relevant stakeholders.

I am one of the Resource Persons in MBA Program of KFA Business School. In few week’s earlier session of ‘Business Environment Analysis’, all the participants were rigorously discussing about the rising interest rates and its impact on ‘Entrepreneurship’.  There is an interesting mix of students in this class - there are young entrepreneurs, bankers, engineers and fresh BBA graduates as well.

 

While bankers were stressing from Bank’s perspective on possible ‘credit crunch’, ‘overshooting credit/deposit ratio’, ‘liquidity problems’ etc., the entrepreneurs, especially the young ones, were really worried with the possible fallout from this upward curve in interest rates. One of the students was mentioning, ‘there is a significant difference of borrowing at 7% and 15%. Difference of 8% on a NPR 50 Million loan means an additional interest cost of NPR 4 Million annually, which is a huge cost burden and unsustainable for a Company of his size. He went on to relate this incremental cost by breaking down in the comparatively monthly cost as under:

 

Particulars

Costs

Monthly Incremental Cost due to Rise in Interest Rate

NPR 333 K

 

 

Existing Monthly Costs:

 

 - Salary

NPR 190 K

 - Rent

NPR 85 K

  - Water, Light, Fuel, Telephone Expenses

NPR 30 K

 Total Existing Monthly Cost (above headings)

NPR 305 K

 

He wrote the above figures in the white board and was explaining, in a situation when the incremental cost  (NPR 333 K per month) due to rising interest rate is higher by more than 9% of the combined Salary, Rent, Water, Light, Fuel and Telephone Expense (NPR 305 K), how can my business sustain this incremental cost? Currently his business employs 12 people. The above case is just an example for rest of the Small & Medium Enterprises (SMEs) of the country.

 

In a new political environment, where everyone would like to believe that we have won the political battle and moving towards stability, the economic parameters in general and ‘stable interest rates’ in particular must be managed prudently by all the relevant stakeholders.

 

Who are the relevant stakeholders? Of course, Government in general and ‘Ministry of Finance’ and ‘Nepal Rastra Bank’ in particular have to take prudent monetary measures to stabilize the interest rates. While very low interest rate regime is also not good for depositors and there could be possible departure of funds from the banking system to other unproductive sectors, high interest rates will paralyze the supposedly most-vibrant entrepreneur firms to sustain their operations, forget the growth.

 

When I talk to few Treasurers of Banking System, they tell me that lack of ‘government spending’ is the major reason for the decreasing liquidity from the market.  Hence, although challenging, Government must quickly develop the mechanism for fiscal transfers of the funds in the new federal setup so that the money flow happens both-ways smoothly.

 

The Small and Medium Enterprises (SMEs) are of key importance to any economy. For example, In India SMEs contribute approximately 20 per cent to the nation's GDP and employ more than 80 million people, the second largest workforce in the country after the agricultural sector.

 

Needless to say, when entrepreneurs stop taking additional risks and expanding their business, resulting from this rise in interest rates, it will have direct impact on employment and purchasing power of the people and if this situation prevails, curbing the Nepalis to go abroad in search of jobs will just be limited to the political slogan.

 

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