KARACHI: Despite government assurances for bank financing with risk coverage, small and medium enterprises (SMEs) are unlikely to receive higher funding in the current fiscal year, banking sector sources told Dawn on Saturday.

They said the interest rate was still unfavourable for financing SMEs, while the government itself was in trouble due to a liquidity crunch and would have to borrow Rs9.3 trillion for deficit financing in FY25.

“There is no room for SMEs to get higher financing from banks at the current position despite the fact the overall economic growth would face the consequences of the low financing to the SMEs,” said a senior banker.

The government launched a Rs1.1 trillion scheme for SMEs early this month to boost economic growth and create jobs on a larger scale.

20pc risk coverage fails to convince banks to lend money at still-high rate

The scheme is part of the government and the State Bank of Pakistan’s (SBP) efforts to double the size of SME financing to Rs1.1tr and the number of borrowers to 150,000 over the next five years.

The State Bank said the government approved the policy for providing up to 20 per cent risk coverage facility to SMEs financing scheme through commercial banks.

“This 20pc risk cover is not enough to force commercial banks to finance SMEs,” said the banker. The banks have been earning huge profits by investing in government papers. Their lending to the federal government reached a record Rs8.5tr in FY24. An unprecedented interest rate of 22pc doubled the banks’ profitability in the outgoing fiscal year.

Financial experts stated that the government could not persuade banks to finance SMEs despite offering risk coverage. The government is facing a serious liquidity shortage and will depend on bank borrowings to meet its expenditures.

At the same time, the government would cut the Rs1.4tr Public Sector Development Programme 20244-25 due to tight fiscal space. Minister for Planning and Development Ahsan Iqbal has said that the development spending may face a massive downward revision of Rs200-400bn.

The SBP has constituted a task force on SMEs in collaboration with the Pakistan Banks’ Association to give practical recommendations for facilitating SMEs and better funding flows to entrepreneurs by establishing various fundamental benchmarks, including defining SMEs and developing a credit coverage mechanism.

Currently, less than 5pc of commercial funding is extended to the crucial SME sector, which is considered the engine of growth in any economy. Banking experts said the high interest rate and easy earnings from government papers would not divert banking liquidity towards SMEs.

The State Bank recently said the ease of access to finance for the SME sector is the priority area for the government, and all banks need to create the requisite infrastructure and systems to extend digital financing solutions for the supply chains of SMEs.

Published in Dawn, August 11th, 2024