SMEs get meagre 7.3pc of bank loans extended to private sector

KARACHI: Bank loans outstanding to small and medium enterprises (SMEs) totalled Rs548.19 billion at the end of May 2024, representing 7.34 per cent of the total amount of finance (Rs7.472 trillion) provided to private businesses during the same period.

This indicates that bank credit is heavily skewed towards large corporations, leaving small businesses underserved.

The State Bank of Pakistan’s latest statistics showed that as of May 31, 2024, bank advances to SMEs increased by 5.63 per cent on a year-on-year (YoY) basis. As of May 2023, the total outstanding loans to small and medium-sized businesses was Rs518.96 billion. By the end of April this year, the total amount of these loans was Rs548.575 billion.

The data showed that short-term or working capital loans amounted to Rs4.342 trillion of all outstanding bank loans to the private sector. Nonetheless, there were Rs2.919 trillion in outstanding long-term or fixed investment loans to private companies.

Due to high borrowing costs; import restrictions on raw materials, equipment, and machinery; unclear policy due to political unpredictability; and the rationalization of subsidised long-term financing facilities; the demand for bank credit from private borrowers -- that is, businesses and consumers -- has remained weak since the previous fiscal year.

Aside from exorbitant interest rates, SME funding is beset with other obstacles; the diminishing ability of SMEs to repay debt and their unreliable cash flow are two major issues.

The SBP’s push and pull tactics have led to an increase in SME financing, whenever it is attained by certain banks. But this kind of enthusiasm only lasts for a few months or a year. Lending to SMEs is stopped by risk management prudence as the default rate rises. The new-to-bank rate stays stagnant as the banks deal with their current clientele.

The SBP set up re-financing facilities for modernizing SMEs and storing agricultural commodities. With the specific goal of helping companies that are unable to provide security or collateral to obtain bank financing, the SBP launched an initiative in 2021 to enhance SMEs’ access to financing. The project is called ‘SME Asaan Finance’, or SAAF, to highlight the SME facilitation aspect of this plan, which enables SMEs to receive clean loans -- that is, loans devoid of collateral.

The SME sector is crucial to Pakistan’s economy, with official figures estimating that it generates 25 per cent of export revenue and 40 per cent of the country’s GDP.

SMEs still face trouble obtaining official bank funding. This is caused by several factors, such as comparatively larger loan losses, expensive bank financing models, inadequate use of the right technologies required for financing SMEs, and inadequate security. As a result, SMEs frequently resort to extremely costly informal lending and experience growth barriers.