Private Lending to SMEs is Too Low, SBP Needs to Fix it: Finance Committee

The National Assembly Standing Committee on Finance expressed serious concerns over a lower rate of private sector credit (7 percent) to Small and Medium Enterprises (SMEs) compared to 28 and 20 percent in India and Bangladesh respectively.

The committee discussed the disbursement of loans to the SME sector by commercial banks and State Bank of Pakistan’s (SBP) policies in this regard.

The parliamentary panel observed that private lending to SMEs is not encouraging and SBP needs to take regulatory measures, as a major chunk of the credit goes to the government where no risks are involved.

The committee was informed that there are around 3.2 million business enterprises in Pakistan out of which more than 90 percent are SMEs contributing 40 percent to the GDP, employing more than 80 percent of the non-agricultural workforce and generating 25 percent of export earnings.

Outstanding SME finance has increased from Rs. 288 billion as of December 31, 2014, to Rs. 477 billion as on December 31, 2019, showing an increase of around 66 percent over a period of five years.

Irfan Ali, a senior official of SBP, briefed the committee about a policy defined by the SBP for promoting the SME sector while saying that certain measures have been taken in this regard.

He said that the policy has nine pillars which include improving regulatory framework, up-scaling of microfinance banks, risk mitigation strategy, simplified procedures for SME financing, program based lending & value chain financing, capacity building & awareness creation, handholding of SMEs, leveraging technology for promotion of SME finance and simplification of taxation regime.

The committee noted that the government should review its policy for the SME sector at the earliest because this sector is considered the backbone of the economy. Senior representatives from commercial banks (UBL, ABL, BOP, and Al-Falah) were also present in the meeting and expressed their policies for the SME sector.

SBP is offering incentives and is targeting an increase in private sector credit to SMEs from 8 percent to 17 percent and the number of borrowers to 500,000 by 2020.

With a view to allowing leveraging of the risk-sharing facility, SBP is developing a market-based mechanism for offering the risk-sharing facilities to financial institutions on their financing to the SME sector. For this purpose, Pakistan Credit Guarantee Company (PCGC) has been established which is expected to be operational by June 2020.

Further, the Financial Institutions (Secured Transactions) Act is aimed at the creation of Secured Transactions Electronic Collateral Registry in Pakistan. Under this framework, an electronic collateral registry has been established.

The registry will help banks create a charge on the movable assets of the SMEs. The registry is expected to be operational by June 2020, Ali added.

The meeting was attended by MNAs Jamil Ahmed Khan, Faheem Khan, Qaiser Ahmed Sheikh, Ali Perviz, Dr. Aisha Ghaus Pasha, Nafisa Shah, Muhammad Israr Tareen, Abdul Wasay, Sardar Nasrullah Khan Dreshak, Syed Naveed Qamar, Hina Rabbani Khar, and Moulana Abdul Akbar Chitrali, and Ali Nawaz Awan, MNAs/movers of the bill/calling attention besides the senior officers from Ministry of Finance, Revenue & Economic Affairs, FBR and SBP.