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KARACHI: Outstanding financing for small and medium enterprises (SMEs) increased 27 per cent to Rs380bn in 2016-17, said a report by the State Bank of Pakistan (SBP).
The government has been trying to boost the SME sector for many years. But the size of SME financing is still significantly lower than private-sector financing, which increased by Rs699.4bn during the same period.
However, the ratio of non-performing loans (NPLs) for the SME sector dropped from 27.3pc to 20.7pc during the same period.
SME financing as a percentage of private-sector financing dropped to 7.99pc from 8.23pc at the end of March. However, it stood at 7.34pc in June 2016.
Successive governments as well as the SBP have emphasised the need for higher growth in the SME sector. But commercial banks avoid lending to SMEs because of their high default ratio.
SMEs have the highest default ratio among all segments despite a noted reduction over the last fiscal year.
The SBP reported the share of SME financing in total financing was just 6.06pc at the end of June. Over 50pc of SME financing was for working capital. This has been a problem for the entire economy as working capital consumes a large chunk of financing every year. This means smaller amounts are being used for fixed investment.
SMEs received Rs44bn for working capital and Rs21.1bn for fixed investment during the period under review. Domestic private banks played a key role in increasing SME financing, which increased by Rs60bn to Rs257bn. Islamic banks also enhanced SME financing from Rs11bn to Rs25bn.
A top official at a public-sector bank recently said a high default rate is the main hurdle in growing SME financing. Public-sector banks provided these companies with Rs7bn financing during the period.
Published in Dawn, August 24th, 2017
