SME financing: Long road ahead

It is now a well-known fact that access to financing is one of the biggest hurdles being faced by SMEs in their quest to sustain and grow themselves. The SBP has also realised this and has been taking steps to encourage credit supply which have borne some fruit. SME financing increased by 14 percent in FY16 as compared to FY15 with a recorded amount of Rs298 billion according to the SBP's Quarterly SME Finance Review for the year ended June, 2016.

According to the figures SME financing improved by 5 percent as compared to the previous quarter ended March, 2016. However SME financing as a percentage of total private sector credit still remains dismally low at 7.33 percent and witnessed almost no change. When it comes to non-performing loans (NPLs) there is an improvement of 2 percent on a quarterly basis whereas a year on year comparison witnessed a decline of 4 percent.

With over 90 percent of the country's enterprises falling into the SME category, only about 7 percent of the Rs4 trillion private sector financing is given to the SME sector. The ratio of SME financing to GDP improved by a marginal percentage and still stands at 1 percent of GDP.

Even though the SBP has mandated targets for SME financing for banks/DFIs with effect from January 1, 2016, there has been only marginal increase in SME lending as a percentage of private sector lending in the past two quarters.

A breakdown of the SME financing according facility showed that working capital was the predominant use with 66 percent whereas fixed investment and trade had 23 and 11 percent allocations respectively. The services sector took the lead in availing SME financing at 37 percent of outstanding SME financing followed closely by manufacturing at 36 percent and trading at 27 percent. The services sector witnessed a growth of 10 percent as compared to the previous quarter while the manufacturing sector financing decreased by 1 percent.

However, agricultural SME financing still represents only 5 percent in terms of total outstanding SME financing as well as in terms of total borrowers. For a country which has more than half of its SMEs in the agricultural sector 5 percent is abysmal. The figure has witnessed an increase of 16 percent as compared to the last quarter but the percentage needs to improve drastically given the poor state of small and medium farmers.

A breakdown by amount shows that by the end of Jun-16 quarter, loans up to Rs5 million had 36.7 percent share in total SME financing. It covered 93 percent of total SME borrowers, out of which, a large number of SME borrowers availed loans of up to Rs 0.5 million.

Loan amounts of over Rs. 5 million and up to Rs. 30 million had a share of 37.6 percent in total financing, while over Rs30 million and up to Rs50 million had a share of 10.5 percent; Loan amounts of more than Rs. 50 million had a share of 15.2 percent in total outstanding SME financing. The majority of SME financing came from private sector banks contributing 67 percent and had quarterly growth of 3 percent whereas public sector banks had a share of 27 percent.

The SBP has been busy in introducing measures such a secured transaction registry, credit guarantee schemes and capacity development measures for banks and DFIs. The NFIS strategy adopted by the bank also has ambitious targets of increasing SME credit outreach to 300,000 SMEs with a growth rate of 82 percent. The SBP also hopes to increase the proportion of SME lending to total bank credit to the private sector from 7 percent in 2015 to 15 percent in 2020. But clearly there is a long road ahead with the need for ambitious targets to be complemented with out of the box ideas.