SME borrowing rises 19pc to Rs524.09bn in Q4 2021

KARACHI: The outstanding loans from banks and the development finance institutions (DFIs) to small businesses increased 19.73 percent to Rs524.09 billion in the last quarter of 2021, the central bank data showed on Friday.

These loans stood at Rs437.71 billion at the end of September. Financial institutions provided Rs481.78 billion financing to small and medium enterprises (SMEs) as of December 31, 2020.

SME finance was 6.51 percent of total private sector credit. It stood at 6.04 percent by the end of September 2021. The rise in the demand for SME loans was attributed to economic recovery from the pandemic and various credit guarantee and long-term financing schemes by the State Bank of Pakistan to boost lending to small businesses. Some banks also started disbursing loans to the customers under a recently introduced collateral-free loan scheme known as SME Aasan Finance (SAAF).

The small and medium firms took out Rs351.61 billion loans to meet their working capital needs as of December 2021, compared with Rs277.29 billion by the end of September, according to the SBP data. These firms obtained Rs130.45 loans from banks and DFIs to fulfill their financing requirements for fixed investment. By the end of December, banks and DFIs had provided Rs42.04 billion worth of trade finance to SMEs, which was slightly higher than Rs41.70 billion extended up to September.

Central bank data showed that financing to the SMEs in the manufacturing segment rose to Rs225.57 billion from Rs156.25 billion. Trading SMEs obtained Rs181.12 billion loans, compared with Rs 167.66 billion loans at the end of September.

Financing to the small businesses engaged in the services sector stood at Rs117.41 billion. That compared with Rs113.80 billion by end of September 2021.

The number of SMEs borrowers reached 164,756 by the end of December last year, compared with 163.629 till the end of September. This sector’s non-performing loans ratio fell to 15.85 percent from 19.10 percent.

The SME sector plays an important role in Pakistan’s economy, and contributes 40 percent to GDP and 25 percent in export earnings as per the Small and Medium Enterprise Development Authority estimates.

However, SMEs find it difficult to access formal bank finance due to several reasons, including relatively higher loan losses, high costs bank finance models, low usage of appropriate technology needed for SME finance and lack of acceptable security.

SMEs therefore often turn to exorbitantly expensive informal credit and face impediments to growth. Majority of SMEs in the informal sector that do not have collateral currently borrow in cash or kind at rates of at-least 25 percent.

Therefore, the SBP launched SAAF scheme in August 2021, which as per the SBP, would be a game-changer in enhancing SMEs’ access to finance as it addresses the long outstanding challenge of lack of collateral faced by these businesses.

Under the scheme, SMEs can avail collateral free financing of up to Rs10 million at the concessionary end-user rate of up to 9 percent per annum to meet their long-term capital expenditure and short-term working capital needs. The scheme also offers reasonable spread to banks to enable them to invest in their processes, systems, human resource and technology.