The State Bank of Pakistan (SBP) is beginning to monitor the small and medium enterprises (SME) sector to ensure that prudent lending to SMEs also becomes the mainstream activity of commercial banks. From the perspective providing credit to SMEs is an attractive tool.
SBP's efforts to bring about good results in this sector have not been successful so far, according to the annual report of the SBP released a couple of days ago.
Since there is risk aversion by banks towards extending credit to SMEs, credit constraints had limited the expansion of these businesses in Pakistan. Realising the large potential for growth and employment opportunities offered by the SME sector, SME Bank was established in the public sector in January 2002. This bank, just like Khushhali Bank for the microfinance sector is intended to act as a prototype for other SME banks in the private sector. Just one bank cannot simply cover the whole vista of SME financing within the country.
The SBP envisages SME Bank taking the lead in developing a portfolio approach or program lending tools where standardised credit scoring methodology is used for each sub-sector rather than the current method of scrutiny and appraisal of each individual proposal. The present methods and documentation are onerous for small entrepreneurs and relatively costly for the banks.
SME Bank has to experiment and come up with the standardised set of easy to fill out fully informational documentation, specification of risk parameters, credit appraisal and delivery techniques and new and innovative products and services which are in heavy demand by the SMEs.
These business models, products, services, techniques developed by SME Bank can then be applied and replicated by other banks planning to enter this particular market segment. The externalities in form of the spillover effect from a public good ie SME Bank will thus benefit the private providers of credit.
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