SME financing falls 7pcto Rs284bln in Jan-March

KARACHI: Banks lending to small and medium-sized businesses lost momentum in the first quarter of 2016 as higher returns charged by microfinance institutions forced SME to borrow funds from informal sector, analysts said on Thursday.

The State Bank of Pakistan (SBP) , in its quarterly SME finance review, stated that outstanding financing of banks and development finance institutions fell seven percent to Rs284 billion in January-March 2016 quarter from Rs305 billion in previous quarter.

The review said small and medium enterprises contribute 30 percent to the gross domestic product of the country, but formal sector’s financing to SMEs is equal to one percent of the GDP.

SME borrowings were 7.65 percent of the total private sector credit during the Jan-March quarter of the current calendar year. However, banks non-performing loans of SMEs rose to Rs82.23 billion in Jan-March quarter against Rs77 billion in October-December period of 2015.

The central bank’s review said outstanding loans of the financial institutions saw a year-on-year increase of 8.34 percent in Jan-March 2016. Analysts said SMEs borrowing remained subdued during the January-March period, despite low interest rate scenario in the country.

 “Loan demands are rising but there are some impediments to access to finance for the small business,” said an analyst. “Small and medium firms need access to funding in order to establish their business and meeting working capital requirements.”

Analysts believe banks reduce loans exposures to small businesses as “they are risk averse from the bad loans on their balance sheets.” They added that the lending rates being charged by the commercial banks are affordable but rates of the microfinance banks are much higher.

The banks are also not financing the SMEs against cash flows. “Almost 98 percent of the lending is collateral based, while the remaining two percent is clean lending,” another analyst said. The central bank has encouraged banks from time to time towards cash flow based financing.   “The documentation requirements and record of tax returns have opened the door to alternatives or non-bank financing channels for the SMEs,” said a banker.