SMALL businesses are rushing to banks to get concessional loans or have bad loans re-profiled under the incentive schemes designed to help them survive amidst the Covid-19–triggered economic slowdown.
But helping small and medium enterprises (SMEs) is a difficult task. The main issue in lending to SMEs has always been their inability to offer acceptable collateral. It took the State Bank of Pakistan (SBP) 12 days, after rolling out the incentive schemes, to address this issue and “encourage” banks to lend up to Rs5 million to SMEs that fail to offer collateral. Two weeks passed after this act of encouragement, but no bank made any collateral-free mass lending. Media reports suggest banks were making clean lending on limited scale.
In making large-scale clean lending, the banks’ main concern was about the repayment of loans whenever they become due after adjusting for the extended grace period announced under the incentive schemes. This concern has now been addressed as the government has promised to bear 40 per cent first loss on the principal of loans. Even in the case of lending against permissible collateral, the problem banks are facing is that audited accounts of small businesses seeking concessional loans are weak and in some cases “unauthentic”. Loan applications of such companies, too, cannot be entertained unless they present strong, authenticated details of their accounts and operations. In short, only those SMEs can get cheaper loans that are good, regular customers of banks.
Banking prudence marks a dot here. Beyond this dot lies genuine suffering of many SMEs that have been hit by lockdowns and failed attempts of thuggery unleashed in the name of Covid-19. There is a third category of helpless SMEs, too: those that have always operated in the informal sector. One hopes that the SBP and banks will soon make sure that genuinely suffering SMEs are not overlooked, informal-sector SMEs are provided with a chance to regularise their status and thugs are kept at an arm’s-length distance.
Banks realise they have missed an opportunity by ignoring loan requirements of tech startups
The purpose of concessional loaning and lenient treatment of bad loans is to spur economic demand so that a projected 1.57pc recession could be skipped or its intensity be lessened. The Fiscal and Monetary Policy Coordination Board believes that the Pakistan economy can show a modest 1-1.5pc growth during this fiscal year if public-sector spending is accelerated. But that seems too optimistic.
Even to keep negative growth below the projected level of 1.57pc, a lot needs to be done, including quicker distribution of bank credit to SMEs and the consumer sector. That is not happening. Until April 24, banks offered Rs305 billion net credit to the private sector in this fiscal year, down from Rs581bn a year ago. This means banks’ lending in the remaining six days of April and in May-June will determine the level of the revival of economic activity — to some extent, for this fiscal year, but chiefly for the next year starting on July 1.
The State Bank of Pakistan (SBP) has slashed its policy rate by 4.25 percentage points to 9pc. And it has also introduced, with the support of the government, employees’ salary refinance schemes for companies so that they can retain employees for at least three months. To further incentivise them, the government has offered to compensate 40pc first loss on the principal of bank loans just like in the case of SMEs. Such a powerful incentive can be expected to accelerate overall bank credit demand to the private sector. Whereas big corporate entities are expecting further rate cuts, banks are not bothered because they are busy lending heavily to the government via treasury bills and bonds. Until April 24, banks made net fresh lending of Rs1.82 trillion to the federal government alone.
Lockdown restrictions have been further relaxed May 9 onwards. Small shops and city markets will be free to resume operations during daytime while maintaining some standard operating procedures (SOPs). Allied sectors of the construction industry have also got a go-ahead to operate in addition to a number of essential and export-oriented industries. The food industry has already been doing well.
All this can hopefully spur economic activity and meet pent-up consumer demand once lockdown restrictions are relaxed further. But bolstering demand through liberal credit distribution would take more time. The government’s decision to absorb part of possible loan defaults by SMEs came on May 8. Its implementation will start from the workweek starting on May 11.
Perhaps the best banks can do — and they are already doing that — is make frequent and large consumer and personal loans. Because that will enable people to spend on survival needs as well as pre-Eid purchases, boosting sales of consumer items in the shortest possible time.
Banks do realise that by ignoring credit demand of tech startups they have missed an opportunity. Now they are all willing to finance the launch of such startups. After the issuance of a presidential ordinance to promote startup culture, the Securities and Exchange Commission of Pakistan has made necessary amendments to the relevant rules for this purpose. Hopefully, banks can now find enough room to entertain startup credit proposals. Amidst the current environment of social distancing, consumer and startup financing and, to some extent, the financing of progressive digitised SMEs are more feasible than corporate and traditional commerce financing. One area where faster and larger credit is consumable and thus necessary is agriculture. Banks are used to offering agricultural credit on a rolling basis, meaning fresh agricultural loans are made against recoveries.
If banks can go beyond this practice for a while — in the case of creditworthy borrowers — or if the government shows willingness to absorb part of the possible early defaults on farm loans not made against recovery, agricultural credit distribution can be enhanced immediately. That, together with liberal credit distribution to SMEs, may help a lot in supporting a faltering economy.
Published in Dawn, The Business and Finance Weekly, May 11th , 2020