KARACHI, March 9: Knowing that consumer financing fever would subside in future and that it is an area that cannot absorb too much liquidity for long, banks are looking for more sustainable lending opportunities.
The State Bank is also encouraging them in exploring such opportunities including the one offered by small and medium enterprises ready to take off in Pakistan. The central bank has already introduced separate rules that the banks need to observe while lending to SMEs.
The SBP on Tuesday arranged a dialogue between Pakistan Banks Association (PBA) and Small and Medium Enterprise Development Authority (Smeda) for this purpose.
At a meeting presided over by SBP Deputy Governor Tawfiq A. Husain, CEO of Smeda Shahab Anwar Khawaja and his team made a presentation to PBA on how SMEs can contribute to economic growth. Participants of the meeting said the presentation also focussed on how banks could help SMEs meet their financial needs.
The participants told Dawn that Smeda and PBA decided to work on a structured programme for this purpose whereby banks would make industry-based lending to SMEs keeping in view the dynamics of each industry.
They said that for this purpose Smeda would appoint relationship managers who would keep liaison with banks to help secure financing for different sectors of SMEs. "PBA and Smeda will play the role of facilitators," said PBA Chairman Shaukat Tarin.
Banks and Development Finance Institutions lent Rs32 billion to SMEs in 2003 whereas their consumer lending totalled Rs42.7 billion during this period. Senior bankers admit privately that banks would gradually find it difficult to make risk-free and cost-effective consumer loans on a sustainable basis for a too long period.
Most banks realize that they now need to focus more on SMEs lending because credit demand from SMEs is potentially larger than demand for consumer credit - and that the appetite for credit in SMEs may last longer.
The policy makers also believe that banks can impact more on job creation and overall economic growth more through lending to SMEs rather than focussing exclusively on consumer financing. But a paradigm shift is required in the mindset of the banks for lending more to SMEs because they are used to making loans against collaterals. "SMEs lending need to be based on their cash flows or balance sheet strength rather than on collaterals," said head of a bank who attended Tuesday meeting at the State Bank.
"It is in this backdrop that whereas SBP and PBA are willing to encourage banks to develop expertise for cash-flow based lending Smeda will have to make SME borrowers more bankable," he said.
SBP statistics show whereas the number of SME borrowers rose by 15 per cent last year - from 1,433 at December 2002 to 1,642 at December 2003 the number of consumer borrowers skyrocketed by 77 per cent - from 405,988 to 719,474.
Financial analysts say whereas this shows the popularity of consumer financing schemes offered by the banks it reflects badly on their ability to tap lending opportunities in the SMEs sector.
Shaukat Tarin said banks were willing to lend more to SMEs in various sectors but they do need to be specific - not generic in this exercise. "Smeda may sign MoUs with individual banks that are ready and willing to increase lending to SMEs," he said. These MoUs should envisage all details that including the repayment capacity of the borrower that the banks may like to examine.
Smeda has identified eight broad categories of businesses that offer promising opportunities for SMEs. They are (i) Agriculture (ii) Textiles (iii) Leather (iv) Fisheries (v) Marble & Granites (vi) Surgical goods (vii) Gem & Jewellry and (viii) Bicycles.
It has also identified several sub-sectors in each one of these categories of business many of which are export-oriented. Smeda defines SMEs in terms of employment generated through them as well as investment made in productive assets.
It treats an entity a small enterprise if it employs 10-35 people and its productive assets range between Rs2-20 million. Those entities that employ 36-99 people with productive assets worth Rs20-40 million are categorized as medium enterprises.
