HBL sees brighter future for SMEs amid rate cuts

KARACHI: Habib Bank Limited, one of Pakistan’s largest lenders, sees interest rate cuts, improved economic conditions and a favourable regulatory environment as a vital support for the country’s struggling small and medium enterprises (SMEs).

“HBL recognises the immense potential of the SME segment and sees a promising future for it. The developing economic climate presents a favourable opportunity for growth,” HBL said in written responses to questions sent by The News.

“The declining markup rates, coupled with a steadily improving economy, create a conducive environment for businesses to thrive. The regulatory framework in Pakistan is increasingly supportive of SME development, fostering a more enabling environment for these businesses to operate and grow,” the bank added.

Private-sector credit growth experienced a decline in FY23, primarily due to record-high interest rates and sluggish economic activity. However, in FY24, there was an improvement in private sector credit expansion, fuelled by a revival in economic activity, falling inflation and lower interest rates. Additionally, banks were working to improve their advance-to-deposit (ADR) ratio to avoid higher taxes on government securities. However, in late December of last year, the government waived the tax condition related to the ADR.

In January, the State Bank of Pakistan (SBP) cut its benchmark interest rate by 100 basis points (bps) to 12 per cent. This reduction brings the total borrowing costs down by 1,000bps since June 2024.

Pakistan’s annual inflation rate has slowed to 1.5 per cent in February, the lowest level in nearly a decade, a significant drop from a peak of 38 per cent in May 2023.

Currently, the South Asian country is supported by a $7 billion bailout from the International Monetary Fund, which was approved in September. The government attributes the downward trend in inflation to economic stabilisation measures implemented under the IMF loan programme.

“There is no doubt that the SME financing landscape is set to witness a steady rise. HBL remains committed to supporting the growth and development of SMEs in Pakistan,” said Aamir Kureshi, head of products, transactional services, and solution delivery at HBL.

“We have the largest lending of over Rs120 billion to this segment of the economy in the country. Going forward, HBL will continue to play a leading role in empowering this vital sector and driving economic progress in the country,” said Kureshi, who previously headed the consumer, agriculture, and SME banking portfolios at the bank.

Small and mid-size businesses play a vital role in driving economic growth and job creation in Pakistan. These businesses need access to affordable credit and payment solutions to support their development and expansion. However, many SMEs face challenges in obtaining financing through formal channels due to insufficient collateral and the extensive documentation required to qualify for bank loans.

Accessing proxy data remains a concern, as banks primarily rely on documents rather than the actual goods. As a result, many businesses turn to informal sources of credit, which are often perceived as easier options with fewer documentation requirements.

Currently, there are about five million SMEs operating in Pakistan, employing approximately 80 per cent of the non-agricultural labour force. These enterprises contribute around 40 per cent of the country’s GDP and 25 per cent of total exports. According to data from the SBP, only 155,000 SMEs -- equating to just 3.0 per cent -- currently receive financing from the banking sector. The lending portfolio of banks in Pakistan is heavily weighted towards established corporations, which account for approximately 74 per cent of total lending. In contrast, only 5.0 per cent of loans are directed towards SMEs. As of December 2024, SME financing reached Rs638 billion, an increase from Rs543 billion last year.

HBL’s strategy to enhance its SME loan portfolio next year centres around leveraging its extensive network, investing in capacity building and addressing key challenges. The bank has a nationwide presence with over 1,700 branches and a dedicated network of more than 250 SME relationship managers, addressing the unique needs of businesses across the country. Its comprehensive product suite includes working capital, trade, supply chain financing, and more, effectively catering to the diverse needs of SMEs.

To increase penetration in the underserved SME market and address this sector’s growing and widely unmet need for formal finance, The bank is ahead of the industry in addressing the key problem that businesses face when seeking traditional loans: collateral requirements. According to the bank, it developed Asaan Finance, a cash flow and collateral-free financing product, opening up the lending space to an underserved segment of the SME space. Alongside the implementation of quasi-income models to swiftly assess customer financial health, HBL SME banking conducts robust risk management using advanced credit models in shape scorecards. The use of these models not only facilitates faster and simplified credit approvals, enhancing the productivity of the front-end team, but also offers significant customer benefits by reducing documentation requirements and processing time.

The recently launched National Financial Inclusion Strategy (NFIS) 2024-28 by the SBP aims to develop a digitally enabled ecosystem for SME financing. The NFIS encourages banks to digitise their loan application processes and credit management systems. It also promotes the use of scorecard-based financing and the adoption of technology for supply chain financing.