KARACHI: in order to extend more financing to the SME sector, the federal government, on the recommendation of the State Bank of Pakistan (SBP), has approved a risk coverage scheme for securing banks’ fresh exposure against SMEs.
Under the scheme, the government will absorb credit loss up to 20 percent on the banks’ fresh exposure against SMEs including all loans including working capital, running finance and long-term loans.
According to the State Bank, considering the critical importance of SMEs in inclusive economic growth and employment creation, the government has approved this risk coverage scheme for SMEs.
The scheme is part of the government and the SBP efforts to double the size of SME financing to Rs 1.1 trillion in next 5 years. The risk coverage scheme will be for the fresh or incremental financing from July 1, 2024 and SBP to allocate Risk Coverage Limits to each Participating Financial Institution (PFI) against fresh SME finance.
SMEs of new and existing businesses as per SBP definition of SME finance Prudential Regulations will be eligible for the scheme and all commercial banks and Islamic Banks will act as executing agency.
Loan size will be up to Rs 25 million for Small Enterprises (SEs) and up to Rs 200 million for Medium Enterprises (MEs). All types of loans including working capital loans/running finance and long-term loans up to 5 years tenure and security requirements will be as per Prudential Regulations for SME Finance.
The federal government will absorb credit loss, principal portion only, on the banks’ fresh exposure against SMEs and it will be 20 percent first loss coverage against banks’ fresh exposure to SEs and 10 percent first loss coverage against banks’ fresh exposure to MEs.
As per loan loss criteria, the loans classified as loss on the time-based criteria as mentioned in SBP Prudential Regulations for SME Finance for SEs and MEs will be considered as the defaulted portfolio for the purpose of payment of claims against the risk coverage.
Risk coverage Claims will be lodged by banks electronically with the Financial Inclusion Support Department (FISD), SBP BSC within 15 working days after completion of the respective quarter.
However, SBP has made it clear that payment of risk coverage claim shall not obviate banks from the right of recovery of the defaulted amount and banks will continue with their regular procedure for recovery of loans.
The recoveries from delinquent borrowers may be treated in three ways. First, a bank receives recovery from delinquent borrowers and it has pending subsidy claims with SBP under the scheme. In such a scenario, the bank may adjust the recovered amount from the quarterly claims by netting it off from the risk coverage claims.
Second, a bank receives recovery from delinquent borrowers and it has no pending subsidy claims with SBP under the scheme. In such cases, the concerned bank will deposit the recovered amount with FISD-SBP-BSC. FISD will adjust it with any other bank having pending risk coverage claims under intimation to SME Housing & Sustainable Finance Department and Finance Division.
Third, in case where all the banks submit nil claims then the recovered amount will be deposited in a child account “Miscellaneous account (FG MISC)” under Central Account Non-Food 1 on quarterly basis under intimation to Finance Division.
Copyright Business Recorder, 2024
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