The financing of small and the medium enterprises will be governed by a separate set of rules issued by the central bank for compliance by lenders.

While a general policy umbrella still covers small and medium enterprises (SMEs) in the country as a whole, the bifurcation of financing rules will promote a freer flow of funds to small enterprises (SEs).

Banks and development finance institutions (DFIs) are supposed to start separate reporting for SEs and medium enterprises (MEs) after September 30.

Small enterprises are defined as businesses that employ up to 20 people (including contractual employees), with an annual sales turnover not exceeding Rs75 million.

SEs are allowed to borrow up to Rs15 million from a single bank or DFI, or cumulatively from all lenders. Before the bifurcation of SMEs into SEs and MEs, banks normally focused on lending to medium-sized business entities that were covered under the definition of SMEs, and ignored smaller ones.

“Now, the reporting requirement is such that banks will have to tell the central bank how much they’ve lent to SEs, and this will make a difference,” says a senior official of the state-run National Bank of Pakistan.

What is particularly encouraging for SEs is that banks have been required to take a decision on their credit proposals within 30 working days after the receipt of complete documentation. Besides, the State Bank of Pakistan (SBP) has also asked all banks and DFIs to make Urdu translation of important clauses of loan agreements available to small enterprises.

Meanwhile, banks and DFIs can evaluate the collateral offered by SEs for obtaining loans of up to Rs5 million on their own. However, if the lender makes a larger loan (above Rs5 million and up to Rs15 million), it will have to get the collateral evaluated by a professional evaluator approved by the Pakistan Banks Association.

Bankers say another important feature of financing rules for SEs is that banks can now collect cash or recover their loans at places other than their respective branches, and record these recoveries through the use of mobile phone technology. This effectively means that SE owners, particularly those operating in agriculture, far from bank branches, need not travel several kilometres to repay their loans. A banker may come to them, collect their dues, and transfer them to the relevant bank account from a nearby easy-paisa transfer outlet or from a similar fund transfer facility.

This should accelerate the overall repayment of loans, as well as keep the lenders’ bad loans portfolio in check, and create room for banks to continue to lend freely to SEs.

However, central bankers point out that SME financing fell 9.4 per cent in 2012, as banks ignored the sector despite the fact that domestic demand had increased, which could have been used to revitalise the sector. They say that bifurcation of SMEs into SEs and MEs cannot facilitate the flow of credit to the SME sector as a whole or enable SEs to serve as micro unit links into the country’s overall business and trade supply chain, unless banks start lending to SEs and MEs in a big way.

More worryingly, the share of SMEs in banks’ overall lending shrank to 6.8 per cent in December 2012 from 8.3 per cent in December 2011, and the number of SME borrowers declined by more than 21 per cent — from about 168,000 to just 132,000.

The new SE rules are expected to build upon improvements seen in SME financing in the second half of 2012, which recorded a 7.5 per cent expansion, despite an overall decline for the entire year.

Bankers point out that a high infection ratio of loans made to SMEs (34.6 per cent as of December 2012) also makes many banks shy of lending generously. They say that bifurcation of SMEs into MEs and SEs is good for them, as they will now apply different criteria for judging the soundness of loans offered to these two sub-categories of SMEs, and one sub-sector would not be deprived of funds for no fault of its own.

The SBP move to streamline SME financing, particularly to SEs, is a reflection of the trend recently catching up in Asia, where, according to a latest Asian Development Bank (ADB) report, there is a need for a holistic approach to financial inclusion strategies.

“The relationship between SME promotion and finance is like the wheels of a car: if all components are not spinning in synchronisation, a balanced, sustainable and resilient Asia will not be realised,” concludes the ADB report. Countries like China, Japan, India and Bangladesh are already known as big promoters of their SME sectors, and earlier this month, oil-rich Oman also required banks to ensure that SMEs get at least five per cent of their total loans. Oman’s central bank says the move is aimed at fostering more inclusive economic growth and creating additional jobs.

Meanwhile, Zulfikar Thaver, chairman of Union of Small and Medium Enterprises, says SMEs in Pakistan have already played an important role in job creation and inclusive growth, and have also led to the development of business linkages between rural and urban areas.

However, Thaver and many people operating SMEs of one kind or the other keep lamenting about the high cost of bank borrowing. “Whether you treat SEs separately or as part of SMEs, it may have some significance for banks. But for the people who run them, the key issue is the interest rate,” remarks a Karachi-based businessman, Syed Hasan Raza, who runs a medicine trading company.

But Raza and many others like him also acknowledge that the softening of interest rates in the second half of 2012 had a favourable impact on SMEs’ operations. Bankers say that a big four per cent plus growth in large-scale manufacturing (LSM) in three quarters of this fiscal year wouldn’t have been possible without the lowering of the interest rates. They add that growth in the LSM sector will eventually facilitate increased activity in SMEs as well, particularly for those that are in the manufacturing sector.