It is good to see that financing of Small and Medium Enterprises (SMEs) is growing at a fairly rapid pace. According to the latest SBP's Quarterly SME Finance Review released on 28th October, 2016, financing of SMEs by banks and DFIs rose by 5 percent from Rs 283.58 billion at the end of March to Rs 297.52 billion at the close of June, 2016. Year-on-year basis, the financing at end-June, 2016 posted an appreciable increase of 14 percent, when compared with Rs 260.78 billion on 30th June, 2015. A facility-wise break-up showed that working capital financing constituted 66 percent of outstanding SME financing followed by fixed investment and trade finance with shares of 23 percent and 11 percent, respectively. Facility-wise distribution of borrowers indicated that fixed investment was the most popular facility, managing to pick up 52 percent of the borrowers while working capital had a share of 45 percent borrowers. Bank-wise, the share of private sector banks in outstanding SME financing was the highest at 67 percent while public sector banks shared around 27 percent of the loan amount. The number of SME borrowers also soared by 8 percent to 164,733 during 2015-16. Size-wise loans showed that loans up to Rs 5.0 million had 36.7 percent share in total financing, over Rs 5.0 million and up to Rs 30 million had a share of 37.6 percent, over Rs 30 million and up to Rs 50 million had a share of 10.5 percent and above Rs 50 million had a share of 15.2 percent.
Encouraged by a recent rise in SME financing, the SBP has prescribed an ambitious target of 26 percent growth in advances in this particular sector for CY16. The financing of SMEs was targeted to increase by Rs 81 billion to Rs 386 billion by the close of December, 2016 as compared to the level of Rs 305 billion a year earlier. The targets were fixed on the basis of size of banks in terms of assets, branch network, existing SME finance portfolio and the capacity of the individual banks to achieve the required targets. As for the future, SME credit outreach was targeted to increase to 300,000 borrowers by the end of 2020 while the proportion of lending to SMEs to total bank credit was targeted to rise from 7.0 percent to 15 percent.
It may be pointed out that the SBP has taken several initiatives for the promotion of SME financing in the past few years. These include the issuance of separate Presidential Regulations for SMEs, implementation of supportive financing schemes like credit guarantee scheme and other refinance schemes, introduction of PM Business Loan Scheme and moral suasion. As highlighted at various forums, the SBP believes that SME plays a vital role in economic growth, employment generation and poverty alleviation in the country. In addition, the focus on SME sector could shift business activities from informal to formal sector of the economy, increase the flow of tax revenues, reduce income inequality, enlarge middle class in the country, promote innovations and develop entrepreneurial skills. The prevailing conditions and culture in society also calls for emphasis on the SMEs. Most of the households are not well acquainted with the intricacies of the modern corporate sector and prefer to own family businesses of small and medium sizes for a variety of reasons.
While the increased focus of the SBP on SMEs is understandable, it needs to be highlighted that the provision of financial incentives alone cannot ensure speedy growth in credit to this sector. The government and the SBP need to analyse why this sector had not shown the necessary dynamism and rapid growth as witnessed in most of the other countries where the SMEs constitute an overwhelming part of the industrial, business and services sectors. The lack of interest of borrowers in this sector in Pakistan is generally believed to be due to their dislike for disclosure requirements, preference for invisibility due to the possibility of harassment by government functionaries in various departments and the lack of collaterals to satisfy the lending institutions. As such, the authorities need to improve the overall environment to enhance the level of interest of SME borrowers to function more vigorously and join the formal economy to play their part. However, it needs to be said that while SBP's increased emphasis on SME sector is justified, this objective should continue to be achieved through the provision of incentives and not by imposing mandatory targets on the financial institutions which could lead to sub-optimal utilisation of credit.
Comments
Comments are closed.