LAHORE: The PTI government is targeting disbursement of Rs60 billion through commercial banks as clean, collateral-free loans among small and medium enterprises (SMEs) over the next three years, says a senior official of the Small and Medium Enterprise Development Authority (Smeda).

“The SMEs, mostly small businesses, will be eligible to obtain bank loans up to Rs10 million on the basis of their ‘cash flow’ statements as the potential borrowers will not be required to pledge the asset with the lender(s),” the Smeda official, who was not willing to give his name since the scheme is yet to be approved by the Economic Coordination Comm­ittee (ECC), told Dawn.

According to him, the new scheme, which has been designed by the State Bank of Pakistan (SBP), would be offering loans at the lower-than-the market interest rates. “The cost of the subsidy or the interest rate differential will be picked by the government,” the Smeda official claimed.

He said the scheme was based on the recommendations made by Smeda in the draft SME policy. “The clean loans will be available to the SMEs for both fixed capital investments by the borrowers as well as for their working capital requirements,” he added.

Under draft policy, an enterprise with annual revenues of up to Rs150m is classified as small business

Any enterprise with annual revenues of up to Rs150m is classified as a small business and those with their annual sales ranging between Rs150m and Rs800m as a medium sized business, according to the draft SME policy.

A recent media report suggested that the government had agreed to provide seed money for a new financing scheme for the SMEs proposed by the SBP for creating jobs and economic growth.

This had transpired at a meeting presided over by Finance Minister Shaukat Tarin with SBP Governor Reza Baqir participating via a videolink.

Mr Baqir was reported to have briefed the meeting about the scheme under which collateral-free loans will be disbursed among SMEs for tenures up to three years through commercial banks.

“The banks will design innovative products to reach out to the smaller businesses whereas the government will provide risk sharing facility to the banks,” the SBP governor was quoted to have told the meeting.

The new scheme will accelerate the credit uptake ratio of the smaller businesses up to 30pc during three years, he said.

Successive governments have unsuccessfully been struggling to increase the access of SMEs to formal banking credit for rapid growth in this important, labour-intensive sector of the economy. In last five years, the outstanding SME financing has increased by over 22pc or Rs87.2bn from Rs394.6bn in 2016 to Rs481.8bn in 2020 but its ratio as percentage of total private-sector financing has dropped from 9.20pc to 7.27pc in the same period, according to the SBP data.

Likewise, the total number of SME borrowers has increased by just 2339 to 179,934 in five years because of reluctance of the banks to advance loans without sufficient collateral, which most small businesses do not have.

Besides, the high rate of defaults also keeps the bankers from advancing credit to small and medium businesses as the non-performing loans (NPLs) of the SME sector have historically remained high. The NPLs of this segment stood at 15.6pc at the end of 2020, down from 20.3pc five years ago.

The Smeda official agreed that commercial banks will initially face difficulty in approving loans for small businesses on the basis of their cash flow statements because they don’t have this capacity. “But I expect them to develop this capacity in the near future.

After all, the microfinance banks have long been giving small, clean loans on the basis of the daily cash flow assessment of their customers,” he argued.

Published in Dawn, May 12th, 2021