The Governor, State Bank of Pakistan (SBP), Dr Ishrat Husain, on Monday underlined the pre-requisites for the success of Small and Medium Enterprises (SMEs) financing with special emphasis on change of mindset of the bankers.
In his inaugural speech on the launch of 6-day 'Training of Trainers Course on Small and Medium Enterprises Financing', held at the Institute of Bankers Pakistan in collaboration with the International Finance Corporation (IFC), the SBP governor said the capacity development, diversification of products for SMEs and getting out of old mindset of looking at balance-sheets, the collateral or other financial statements were the basic factors that can help SMEs takeoff.
"You are the change agent, catalysts to change, go to your presidents and tell them what you (your bank) need to capture high potential of the SME sector", Dr Ishrat said, and hoped that the trainers would lay the solid foundation of SME lending in the country.
Explaining how the SME lending would help the depositors, banks, economy and entrepreneurs, he said the entrepreneurs have not updated or improved their technology, depending on the machines and techniques of 1950s, 60s or 70s.
"The credit you will provide will enable them to acquire the new technology, improve quality of their products to meet the needs of 2010.
They will re-position them through the new financing facilities that will help earn more profit. As SMEs after agriculture sector, were the intensive employment sector so it would help mitigate the unemployment problem, and high profitability will make them pay more taxes.
All is exercise would benefit directly and indirectly to the health of the economy", he explained.
"If the income of the SMEs goes up, the growth rate and employment ratio vis-à-vis economy will also be accelerated. So it (SME lending) is good business for the depositors, who will get higher returns, good business for banks and entrepreneurs. You can't find this kind of fine linkages in any other sector except SME and agriculture", he remarked.
The SBP governor said the SME credit is a new area and altogether different what the bankers have been doing for the last 50 to 55 years, so they are prone to making mistakes.
Condemning the bureaucratic approach on the part of the bankers, which, he said, led to the non-performing loans to the tune of Rs 250 billion in the past, should not be repeated.
Referring to Indian pattern of lending, Dr Ishrat Husain said the corporate sector lending has squeezed as compared to corporate sector, and the same pattern is expected in Pakistan.
He, however, called upon the bankers to take out that they have learned from corporate sector lending if they want to be a successful SME lender.
"SMEs requires a portfolio approach, it requires a credit scoring methodology as contrary to corporate sector where you see the financial statements, balance-sheets. Here is a different game," the SBP governor warned.
Substantiating his point of view, he said it is imperative that the banker should know the production line, input cost and market demand, which keep on changing time to time, as the market is a dynamic, and would dramatically affect the cash flows vis-à-vis paying capacity of the entrepreneur.
"Every decision will base on product specification and you won't look the documents as they (SMEs) don't have any," he remarked, adding: "that is a change of mindset. That is the change or level when the SMEs will takeoff."
Stressing the need for learning the robust cash flow analysis, Dr Ishrat Husain said if the bankers are looking for documents, collaterals and securities, "then SME is not your cup of tea."
He said the cash flow analysis the technique to be imparted to the trainers, and they would pass on the skill to their trainees, is critical element in SME lending. It will determine the success or failure of the SME, he remarked.
He said cost, profit, prices of the inputs and market trend need to be updated time to time to ascertain the paying capacity of the entrepreneurs, adding: "If your are aware of the factors, you can tailor or re-tailor your recovery schedule according to the cash flow rate of your client."
The SBP governor asked the trainers to tell their trainees that they have to be on the road as the lending to the SME can't be done by keeping oneself aloof to the market factors, saying: "You have to monitor market sentiments and re-align recovery schedule accordingly."
He said the success of the micro-financing was the fact that it had in-built monitoring mechanism and the follow-up approach. It is needed not to re-invest the wheel, but feed the data about the market, prices, trend, demand and international fluctuation of prices of the inputs in your PC and update it time to time to keep yourself updated on the cash flow and paying capacity of your clients.
He said the poor and the middle class has also right to avail the financing facilities and improve their socio-economic status, adding the central bank would encourage the activity.
He also referred to the agriculture sector, for which, he said it would be dealt with different Regulations to meet the uniqueness of the sector as was done in the case of SMEs.
The SBP governor said he was told that the commercial banks would not come for agriculture lending, but he was hopeful for the drastic change, which the SBP reforms made now possible and congratulated the presidents of the banks for taking initiative for the purpose.
He said that agriculture constitute 25 percent of the gross domestic produce and 60 percent of the population is directly linked with the sector besides, indirect linkages like sugar industry, textile, etc. He said it was simply impossible to have equitable growth without giving due attention and focus on the agriculture sector.
Dr Ishrat Husain underlined the need for building bank strategies on two pillars; you have to be prudent and you have to be profitable.
IFC Pakistan Senior Country Manager Farid Dossani while addressing the gathering, said the objectives of the training were basically for increasing the access of SMEs to finances, improving business environment and building internal capacity to grow.
He said the SMEs were main vehicle of growth, and stressed need for eliminating poverty and unemployment and giving a boost to the economy, and 15 percent estimated lending.
He said the SME sector in Pakistan was not satisfactory and efforts were under way to improve it to the required level from where this sector could take off.
Later, IBP Principle Mohammad Saleem Umer wound up the ceremony.
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