Small and Medium Enterprises: Outstanding bank financing grows 8.8pc to Rs524bn in 2021: SECP chief

ISLAMABAD: Securities and Exchange Commission of Pakistan (SECP) Chairman Aamir Khan Thursday said that the outstanding financing by banks to the Small and Medium Enterprises (SMEs) has increased from Rs482 billion in 2020 to Rs524 billion in 2021, reflecting a growth of 8.8 percent.

However, when we look at the number of SME borrowers during the same period, they have recorded a decline of 8.4 percent, the SECP chairman added.

The SECP chairman was addressing a virtual event on the launch of Karandaaz report, “NBFCs in Pakistan – Regulatory Landscape and Bottlenecks” on Thursday.

The SECP chairman said that currently, the SME financing accounts for only 6.5 percent of total domestic private sector financing. A staggeringly low ratio, considering that SMEs account for over 90 percent of businesses and contribute approximately 30 percent to the GDP.

He said that the most significant concern for the NBFCs’ commercial viability stems from their high cost structure brought about by limited capacity for resource mobilization and extensive reliance on credit lines from banks. Inability thus far, to leverage an increasingly digitalized financial ecosystem; and exclusion from government and central bank-backed concessionary funding.

These factors have constricted the growth of the NBFCs in Pakistan, and have been a contributing factor in our inability to match the ambitious targets set in the National Financial Inclusion Strategy.

The SECP chairman said that the NBFCs should not try to emulate banks, and instead focus their efforts on developing a deeper understanding of different customer segments, such as the MSMEs, not served by traditional financial institutions.

NBFCs need to embrace digitalization, and move away from an exclusively brick and mortar approach. The use of data science is one of the areas NBFCs need to focus on, as given their structure, they have the flexibility to take calculated risks and venture into areas not catered by banks, such as micro and small businesses.

NBFCs should not try to emulate banks, and instead focus their efforts on developing a deeper understanding of different customer segments, such as the MSMEs, not served by traditional financial institutions.

The use of data science has revolutionized the financial industry, as analytical tools and modelling algorithms allow service providers to gain valuable insights into market dynamics, customer needs, competition and risks.

There is an urgent need for sound liquidity management.

Fourth, NBFCs should focus on co-branding and collaboration with established operators in other industries such as banking, Insurance, real estate developers, cellular companies etc, to use their services and outreach for offering value-added solutions.

Also, the NBFCs must up-tier their product suites, to create customer-focused products, such as leasing of machinery for SMEs, agri and livestock sectors, agri-produce warehousing, rental of agricultural machinery, distribution of crop insurance, supply of fertilizer & quality seeds, and providing crop and weather information.

There is also immense potential in the space of consumer financing as most of the population does not have access to formal credit.

The improved governance standards are paramount for NBFCs to establish themselves as a viable and strategic part of financial services ecosystem. The NBFCs need to develop a deep understanding of their target market, the broader risk implications, and develop appropriate risk mitigation strategies on scientific basis, to account for changing market dynamics, and to continue to evaluate their business models backed by solid research, the SECP chairman added.

Copyright Business Recorder, 2022