Acute liquidity squeeze choking sales in rural markets, says HUL
Rural consumption, which accounts for about a third of the market came under stress in the past three quarters.
“If you really look at some of the rural areas, at some of the central parts of the country, the overall liquidity crunch is actually coming again,” HUL chief financial officer Srinivas Phatak said on an investor call, adding that the company was making direct interventions to address these disruptions. “We are working with many of our banking and financial partners to find the right kind of solution and support our distributors and that’s working well. In some select cases, we actually stepped in to support our distributors through credit.”
He cited cuts by the Reserve Bank of India (RBI) in the policy rate by a cumulative 135 basis points this year to help revive the economy and steps to ensure such reductions were transmitted through benchmarking. A basis point is one-hundredth of a percentage point.
“While many measures have been initiated, there still has to be the transference through the banking system,” Phatak said. “The liquidity still continues to be quite tight and, therefore, the improvement is some distance away.”
Credit growth at Indian banks is at its lowest in nearly two years at 8.8%, according to the latest RBI data. The liquidity crunch at nonbanking financial companies (NBFCs) has had a knock-on effect as this source has dried up for informal, rural and small & medium firms.
“Post the liquidity challenge after IL&FS (Infrastructure Leasing & Financial Services) crisis, disbursements across NBFCs had slowed down, impacting cash flows and delaying payments across the supply chain,” said a recent JM Financial investor note. The default by the IL&FS Group in September last year sparked the liquidity crisis that has engulfed NBFCs.
HUL isn’t the only consumer goods company that’s been affected. Earlier this month, Marico said in its quarterly update that liquidity challenges had led to some correction in trade inventories and exerted pressure on channel partners’ investments and returns.
Companies, especially those with substantial rural sales, have been lending support to their trade channels.
“We have extended temporary credit to distributors on a selective basis to help them tide over the tight liquidity environment,” said Mohit Malhotra, chief executive officer at Dabur, the maker of Vatika shampoo and Real juices, which derives 45% of its overall domestic sales from rural areas.
The Indian fastmoving consumer goods (FMCG) market grew 7.3% in the September quarter, compared with 16.2% in the year earlier, according to a Nielsen report released on Thursday. Rural consumption, which accounts for about a third of the market and has been outpacing urban sales growth, came under stress in the past three quarters. It grew at a seven-year low of 5%, sharply decelerating from 20% a year ago.
In the past decade, sales of branded daily needs in the nation of 1.3 billion people have increasingly relied on the rural hinterland, home to more than 800 million, whose purchase behaviour is largely linked to farm output. Rural India accounts for 36% of overall FMCG sales.
Nielsen said small manufacturers have seen the biggest drop in both distribution as well as sales. Such companies, which accounted for nearly a third of sales in the hinterland, contracted 23%. Small player exits have increased by 33% and new entrants in the market have fallen too due to strong inflationary pressures and increasing input prices, said the report.