The efforts to boost SME finance are clearly not yielding results. Analysis of central bank data reveals that loans to SME dropped sharply by 47 percent year-on-year in the seven months ending January 2018, even as loans to non-SME private sector businesses rose 33 percent in the same period.
This fall is visible in both major SME sub-sectors: loans to ‘manufacturing’ SMEs was down 23 percent whereas loans to ‘commerce & trade’ SMEs fell 23 percent. Within the manufacturing SMEs, it was ‘food & beverages’ sub-sector that attracted higher loans in the seven-month period.
There are clear cut answers behind this growth. But the central bank’s State of Pakistan’s Economy report does provide a clue. “Growing consumer base in the country has been the major pull factor encouraging domestic players to reposition, especially in the food and FMCG sectors. Edible oil, poultry and sugar manufacturers are all working towards gaining efficiency, attaining modern technology and reducing their production costs,” the SBP’s report said.
Considering that a host of poultry and edible oil players fall in the SME category, one can assume that these two sectors are primarily driving the loans in food & beverages SME sub-sector. Channel checks also report that edible oil manufacturers have been installing extraction plants; so is the poultry industry following their clash with the solvent extraction industry. (See BR Research Dec, 7, 2017, “Self-interest or national interest”) It is also quite clear that while the export and textile packages have helped non-SMEs,
it hasn’t helped the SME sector. For instance, net borrowings by non-SMEs in sports goods sector rose 7.6 percent year-on-year in 7MFY18, but sports SMEs posted a higher net-retirement in the same period. Likewise, while borrowing by non-SME textile rose noticeably in 7MFY18 that by textile SME actually fell. This reiterates the view that “exemptions don’t do the trick” since” they are skewed towards larger firms”. According to a World Bank study presented in a November 2017, about 62 percent of the duty exemptions in FY16 were claimed by the then top 100 firms.
These findings give credence to the view that the supply of cheap credit to SME may not create its own demand. Aside from demand side factors alluded to in Pakistan’s ‘Nagori’ problem (published Feb 28, 2018), information asymmetry and absorption capacity issues will also have to be addressed.
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