Rs 60 billion unsecured loan plan for SMEs in preparation – Journal
LAHORE: The PTI government is targeting disbursement of Rs 60 billion through commercial banks in the form of clean, unsecured loans to small and medium-sized enterprises (SMEs) over the next three years, a senior official said. Small and Medium Enterprise Development Authority (Smeda). .
âSMEs, mostly small businesses, will be eligible for bank loans up to Rs 10million on the basis of their ‘cash flow‘ statements, as potential borrowers will not be required to collateralize the money. active with the lender (s), âA Smeda official, who was unwilling to give his name because the project has not yet been approved by the Economic Coordination Committee (ECC), told Dawn.
He said the new system, which was designed by the State Bank of Pakistan (SBP), would offer loans at lower than market interest rates. “The cost of the subsidy or the interest rate differential will be chosen by the government,” said the Smeda official.
He said the program was based on the recommendations made by Smeda in the draft SME policy. âOwn loans will be made available to SMEs for both fixed capital investments by borrowers and for their working capital needs,â he added.
According to the draft policy, a business with an annual income of up to Rs 150 million is classified as a small business
Any business with annual revenues of up to Rs 150 million is classified as a small business and those with annual sales of Rs 150 to 800 million as a medium-sized business, according to the SME Policy Project.
A recent media report suggested that the government had agreed to provide seed capital for a new SME finance program proposed by the SBP to create jobs and economic growth.
This happened during a meeting chaired by Finance Minister Shaukat Tarin with the participation of SBP Governor Reza Baqir via a video link.
Mr. Baqir reportedly informed the meeting of the system whereby unsecured loans would be disbursed among SMEs for terms of up to three years through commercial banks.
âBanks will design innovative products to reach small businesses while the government will provide a risk-sharing facility for banks,â the SBP governor reportedly said at the meeting.
The new system will speed up the small business lending rate to 30 percent for three years, he said.
Successive governments have struggled to increase SMEs’ access to formal bank credit for rapid growth in this important labor-intensive sector of the economy. Over the past five years, the stock of SME finance has grown by more than 22%, or 87.2 billion rupees, from 394.6 billion rupees in 2016 to 481.8 billion rupees in 2020, but its ratio as a percentage of total private sector funding fell from 9.20 to 7.27 in the same period, according to SBP data.
Likewise, the total number of SME borrowers has only increased from 2,339 to 179,934 in five years due to the reluctance of banks to make loans without sufficient collateral, which most small businesses do not have.
In addition, the high rate of defaults also prevents bankers from advancing loans to small and medium enterprises, as non-performing loans (NPLs) from the SME sector have historically remained high. NPLs for this segment stood at 15.6% at the end of 2020, up from 20.3% five years ago.
The Smeda official agreed that commercial banks will initially have difficulty approving loans to small businesses on the basis of their cash flow statements as they lack this capacity. âBut I expect them to develop this ability in the near future.
After all, microfinance banks have a long history of making small, clean loans based on the daily assessment of their clients’ cash flows, âhe argued.
Posted in Dawn on May 12, 2021