Small enterprises play an important role in the economic and social development. But unfortunately the sector has remained generally neglected and its importance has not been recognised.

The sector has not even been properly documented and its share in the GDP has been estimated on the basis of surveys conducted after the gap of many years. The figure remains unchanged in the intermittent period.

Of about 3.2 million such establishments in the country, 56 per cent are located in urban and 44 per cent in rural areas whereas 99.06 per cent of them employ 1-10 persons. Individuals own 97 per cent of such establishments.

Sector-wise bifurcation shows that 53 per cent of these establishments belong to wholesale and retail trade and restaurant and hotel sectors, 20 per cent are part of manufacturing sector and 22 per cent fall in the community, social and personnel services sector.

The banking industry has remained reluctant in extending credit to the small enterprises. Bankers find it difficult to apply the same yardstick to them as commonly used in the case of corporate finance. To overcome this difficulty, two steps were taken in the recent past. First, commercial banks were advised to extend the credit to these sectors on priority basis by giving them the mandatory credit targets.

But realising that this step was not enough as banks were ready to pay penalty instead of giving credit to the small enterprises, various specialised institutions such as Small Business Finance Corporation and Regional Development Finance Corporation etc. were established.

Later on, some changes were made. Mandatory credit targets for commercial banks were discontinued and these two institutions were merged to form a new institution i.e. Small and Medium Enterprises Bank.

However, it has been proved that the specialised institutions are not the perfect alternative to commercial banks. This is true for all sectors of the economy--agriculture, manufacturing, small and medium enterprises. It is not possible for one or two institutions to cater to all the credit needs of some sector and particularly a large sector such as the small business and industry.

The tootal amount disbursed by specialised banks to this sector by December 2007 was Rs10 billion which is only about 2.27 per cent of the of total portfolio of the banking industry extended under the head of SME finance. The share of SME bank is about Rs7 billion or 1.84 per cent of the total portfolio. A look at the performance of these specialised banks shows that this figure of Rs10billion is hovering around for some years. And the share of specialised banks portfolio has in fact reduced by 5.3 per cent during the period December 06-December 07.

In many countries, banking industry has adopted innovative approaches for exploiting the business potential of the sector. This include, designing of new products, risk criteria, SME financial reporting standards and special lending techniques etc. In Pakistan also in the period of excess liquidity, banks began to realise the potential of this sector and decided to tap it.

Although the share of the credit to this sector is well behind the corporate sector’s share of about Rs1 trillion or 40 per cent of the total credit by banks, it is still comes the second. At end-March 2008 this sector’s outstanding credit stood at Rs403.4 billion i.e.14 per cent of total credit of banking industry.

Similarly, at the end of December 2007, the number of borrowers also increased by 14.93 per cent to 185,039 as compared to 161,008 at the end of March 2006. But the share of five major banks in the total credit has been declining for some years. It declined from 50 per cent at the end of December 2006 to 45.07 per cent or Rs197 billion at end December 2007.

The share of “private banks” was more than these major ones i.e. 46.06 per cent or Rs201 billion at end December 2007. The remaining share of about nine per cent of the total portfolio of the loans to this sector is shared by foreign banks, Islamic banks excluding Al-Baraka and specialised banks including the SME Bank.

SME finance goes mainly to the manufacturing and commerce and trade which received 42 and 32.7 per cent respectively of the total outstanding credit as on March 2008. This was followed by construction, transport and communication, and real estate, renting and business activities, which received four, three and 2.8 per cent of the total outstanding loan respectively. The total non-performing loans (NPLs) of the SME sector stood at Rs41.3 billion i.e. 9.5 per cent of the total SME finance as at end December 2007. These are 20.5 per cent of the total NPLs of Rs201 billion of the banking industry. A look at the behaviour of SME sector NPLs show that it has been moving between the range of Rs35 billion to Rs41billion for March 2006 to December 2007, with no change in ratios.

However, the present situation is difficult for the growth of the small enterprises. There is shortage coupled with the rising cost of electricity and the decline in consumer demand due to sharp rise in the prices. Hundreds of cottage industries have been closed mainly due to the long hours of load-shedding.

Apart from this, the changed financial scenario of increased interest rates and liquidity crunch has also created an adverse environment for this sector. The default ratio which has remained within the acceptable limits so far, may rise. Keeping in view the SME’s importance, the authorities should take necessary steps for redressing its difficulties and problems so that the sector may grow to its potential.