The central bank Monday reiterated its concern over a more risk-averse posture of the banks towards extending loans to the private sector particularly the Small and Medium Enterprises (SMEs).
This, the regulator said, over the last four years had shrunk the banks’ credit by Rs 189 billion or 43.2 percent to the SMEs from Rs 437 billion in 2007 to Rs 248 billion in June 2012.
“Lending figures of SMEs are not encouraging in recent years,” said Deputy Governor State Bank of Pakistan (SBP) Kazi Abdul Muktadir while opening a three-day training program on “Scaling Up SME Banking Business” held here at a local hotel by the central bank in collaboration with International Finance Corporation (IFC).
With this decline, the SMEs’ loan proportion to the total advances of banks has also decreased from 16 percent in 2007 to less than 8 percent in 2012, the deputy governor said.
He said this decline could partly be attributed to adverse economic conditions during the period and growing non-performing loans (NPLs).
However, he observed that a more risk-averse posture of banks remained a major factor responsible for their low exposure to SMEs.
“Banks in recent years have increasingly invested in safer havens – opting for government paper and increased financing for commodity operations, rather than supporting the private sector which is the main driver of economic activity,” said Kazi.
Urging the financial industry to take steps for promoting SMEs through prudent and more innovative banking solutions, Kazi said the banks should formulate strategies to overcome the challenges faced by the SME sector.
He said the banks needed to shift from traditional banking approach towards SMEs to the provision of more customized and differentiated financial products and services to suit different SME segments.
The banks also needed to develop and implement appropriate credit evaluation techniques used globally such as credit scoring, cash flow-based lending and program-based lending, said Kazi.
He pointed out that the SME sector contributes 30 percent towards GDP, employs more than 70 percent of the non-agricultural workforce and generates 25 percent in the export earnings of the country. “However, despite its significance, the growth of SME sector in Pakistan remains constrained by a number of factors on both the demand and supply side,” he added.
Recounting the various important measures taken by the SBP for improving the business environment for SME sector, he said these include provision of Prudential Regulations (PRs) for SMEs, Refinance Schemes for SMEs, Credit Guarantee Scheme for Small and Rural Enterprises and cluster development surveys.
He said SBP, in collaboration with IFC, had been assisting banks in their capacity building efforts with focus on the areas of Strategy Formulation, Product Development, Risk Management and HR Development.
“These efforts will revitalize the SME lending in participating institutions and will be a prototype for other institutions which could see SME financing as profitable business venture,” said Kazi.
