Bank Financing for SMEs Surges to All-time High

Bank financing for Small and Medium-Sized Enterprises (SMEs) showed modest growth of 8.7% year-on-year in 2021 due to improvement in the business climate coupled with the increasing approach of banks to reach out to their target customers.

This is an all-time high in the history of the banking sector due to various schemes and targets designed by the banking regulator including the SME Assan Finance scheme which gives provides loans to small businessmen without the requirement of collateral.

Previously in 2019, the banking sector surpassed the financing value of Rs. 500 billion for the first time. Next year, the banking sector did not sustain growth.

According to data released by the State Bank of Pakistan (SBP), bank loans to SMEs surged to Rs. 524.8 billion by the end of 2021 as compared to Rs. 481.8 billion in 2020.

The manufacturing sector remained availed the most loans from banks to the tune of Rs. 225 billion in 2021, followed by the trading sector with Rs. 181 billion and the services sector with a financing value of Rs. 117 billion in 2021.

Specialized banks loaned Rs. 344 billion to SMEs in 2021. Public sector banks loaned Rs. 128 billion to SMEs and Islamic banks disbursed Rs. 38 billion to SMEs in the same year. The loans made by commercial banks and DFIs stood at Rs. 8.8 billion and Rs. 3.8 billion respectively.

Besides growth in the financing, the ratio of Non-Performing Loans (NPLs) in the SME sector improved to 19.1% in 2021 from 21.8% in 2020.

On the contrary, the number of borrowers in 2021 stood at 172,893 as compared to 188,804 in 2020.

Last year, SBP decided that rather than advising all banks to offer this product, only willing banks will be encouraged to be a part of this initiative and develop their expertise through a transparent process.

Accordingly, 8 out of 20 banks were selected under four categories on the basis of the highest amount of loans and the highest number of SME clients to be served under SME Asaan Financing (SAAF).

Under the scheme, SBP will provide refinancing to banks at 1% per annum (p.a.) for lending to SMEs at a maximum end-user rate of up to 9% p.a. The end-user rate under SAAF would be attractive for SMEs when compared with the usual cost of financing from informal sources which can be 25% – 50% p.a. The margin available to banks will help them to make an upfront investment in human resources, technology, and processes for promoting SME financing.

This incentive has been provided to banks for the first three years after which it is expected to become self-sustaining. Additionally, under SAAF, risk coverage of up to 60 percent is being provided by the Government of Pakistan. Under the SAAF scheme, SMEs can avail collateral-free financing of up to Rs. 10 million to meet their long-term capital expenditure and short-term working capital needs.