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Distributors in India will continue to face credit pressure, but some will face more pressure than others

DuckerFrontier, October 15, 2020

Small and medium-sized enterprises (SMEs) in India have been hit particularly hard by the pandemic due to trickling revenues and withering credit lines. To address this issue, the Indian government earmarked about US$40.8 billion in emergency credit guarantees for SMEs as part of its US$265 billion stimulus package in May. Less than half of this amount (about US$17.1 billion) has been disbursed as of October 1.

Our view: Although the government has provided a portion of the earmarked loans to SMEs to help them navigate the current credit crunch, those loans have been dispersed unevenly. A substantial number were provided to larger SMEs because banks remain reticent to extend credit to smaller companies, even when the loans are fully guaranteed by the government. As the pandemic continues to spread at a rapid pace in India, we expect financial institutions to continue exhibiting this behavior, so credit conditions for smaller SMEs are likely to remain especially tight.

Business implications: Multinationals’ local distributors will likely continue to struggle with gaining access to credit. However, some distributors will struggle more than others. Larger distributors in select sectors like services, food processing, trade, metals, and construction will likely see better credit conditions than others due to higher loan availability. Companies across the board should continuously evaluate their distributors’ financial strength and should consider supporting key partners to secure credit where possible during this extreme financial crunch.

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