Banks Pushed to Increase Loans to SMEs

In order to boost the scale of Small and Medium Enterprises (SMEs), banks have been pushed to advance loans to this sector with the target increased from 8 percent to 17 percent of overall loan portfolio of the banking industry by 2020.

In this regard, the central bank has set various benchmarks for the banking sector for lending to SMEs, which is the key impediment in their growth in Pakistan. Hence, the number of borrowers limited to 174,000 is to be increased to 500,000 by 2020.

According to a research, the significance of SMEs is also evident from the fact that they constitute over 90 percent of estimated 3.2 million business enterprises in the country.

In overall macroeconomic terms, SMEs (defined on the basis of number of employees) contribute towards 30 percent of the GDP and 25 percent in export earnings, again endorsing the significance of the sector to our economy.

The central bank specified sectors for financing and refinancing facilities for highly potential sector which including IT, furniture, surgical goods, dates processing, gems & jewellery, leather industry, fruits, vegetables & food processing and packaging, printing & packaging.

SBP Revises Upward Financing Limit of MFBs

SBP has increased the financing limit of eligible Micro Finance Banks (MFBs) from Rs. 0.5 million to Rs. 1 million. These loans will also be eligible for risk coverage under the Credit Guarantee Scheme.

The central bank is coordinating with provincial governments to facilitate them in their efforts to enhance SME credit. In this regard, different provinces have approached SBP for provision of risk sharing facilities for lending to SMEs. The bank is facilitating the provincial governments in their refinance and risk sharing schemes as well.

Banks/DFIs will also have to develop strategies for improving delivery channels, adoption of credit scoring technology, improving understanding of the target market through field work and research, and putting in place strong marketing and SME sales teams.

Under the current target regime, SME financing targets are assigned to banks (including Islamic banking institutions (IBIs)) and DFIs on institutional basis. SBP had advised banks & DFIs to allocate themselves region wise targets for 2017.

From January 01, 2018, SBP will assign provincial targets for SME financing to banks (conventional and IBIs). SBP (BSC) offices will be involved in the monitoring mechanism.

Going forward (from January 01, 2019), gender-wise targets as well as separate targets for small and medium enterprises will also be assigned to banks and DFIs.

Banks have also been advised to establish and structure SME Research and Development (R&D) set-up to effectively undertake the above activities.

Technological Innovation

The use of technological innovations in SME finance paves the way for the banks to deliver their financial services to target clients at relatively low cost. The use of technology also reduces banks’ cost of searching and exploring potential clients.

Although branch-less banking, internet banking and SMS alert services are becoming common, technology can further be used in other banking services like cash management (by integrating payrolls, trade credits & receivables), credit origination (through online credit applications) and other services.

Since Pakistan has been actively utilizing technology for improving its payment systems, banks are encouraged to effectively use technology and branchless banking for promotion of SME financing through digital credit, client profiling, payment solutions, etc.

An innovation challenge fund will also be launched to explore new solutions to promote SME financing through technology.

SBP will also be collaborating with universities and FinTech companies to initiate pilot projects for the purpose. It has also recommended the Ministry of Commerce to encourage SME startups to export their handicrafts and other items. In this regard, it is recommended to create a Marketplace Website for on-boarding these entrepreneurs on a single platform.

Moreover, credit processing time for SE loans has been reduced from 30 days to 15 working days. Further, maximum turn-around-time for loan processing of MEs has also been fixed at 25 working days.

Financing to SME Sector Stands at Single Digit

Banking industry of Pakistan started focusing on small and medium enterprise (SME) sector during the period of 2004-2006 because of which, SME financing (Rs. 408 billion) reached at 17 percent of total private sector financing by banks & DFIs in December 2006.

However, following the economic slowdown since 2007-08, SMEs became less profitable and highly risky ventures for bankers. SBP has been making efforts and playing a supportive role due to which SME financing started rising from 2013.

The outstanding SME financing crossed Rs. 400 billion in December 2016 compared to Rs. 284 billion in December 2013, which was 9 percent of the total private sector credit.

Under the National Financial Inclusion Strategy (NFIS) and strategic direction of SBP, SME sector has been identified as one of the key priority areas.

In order to achieve these objectives, a policy has been prepared for promotion of SME finance (conventional & Islamic) in Pakistan.

There are 9 key pillars of this policy which include:

  • Improving regulatory framework,
  • Up-scaling of micro finance banks,
  • Risk mitigation strategy,
  • Simplified procedures for SME financing,
  • Program based lending & value chain financing,
  • Capacity building & awareness creation,
  • Handholding of SMEs,
  • Leveraging technology
  • Simplification of taxation regime

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