KARACHI: The State Bank of Pakistan (SBP) on Monday introduced a financing scheme for Small and Medium Enterprises (SMEs), enabling them to get loans without collateral.

The SBP said the scheme had been launched to improve the SMEs’ access to finances in collaboration with the government aimed at enabling the businesses that cannot offer security or collateral to access bank finance.

“This initiative has been brand named, ‘SME Asaan Finance’ or SAAF to emphasise the SME facilitation feature of this scheme to provide clean lending i.e. lending without collateral to SMEs,” said the central bank.

Under the scheme, the SBP will provide refinance for three years to the selected banks. After three years, the refinance will be repaid by banks in 10 equal yearly instalments.

Govt to provide risk coverage of 40-60pc to selected banks against losses

“Selected banks will get refinance from the SBP at 1 percent per annum and extend financing to SMEs at end user rate of up to 9pc p.a. which is very attractive compared to informal finance costs,” the SBP said.

Under SAAF, all SMEs that are new borrowers of a bank will be eligible to avail financing of up to Rs10 million. The collateral-free (clean) financing will be available to SMEs for long-term fixed capital investment and working capital finance requirements.

Shariah-compliant Islamic as well as conventional modes of finance will be offered. The scheme will be available to SME borrowers towards the end of September 2021.

An attractive feature of the scheme is that the government will provide risk coverage of 40 to 60pc to the selected banks against losses depending on the size of loans.

This risk cover will be 60pc for small loans up to Rs4 million; 50pc for midsize loans from above Rs4m to Rs7m and 40pc for relatively large loans of Rs7m to Rs10m.

The SBP will provide refinance to banks while the government will support via partial credit guarantees to the participating banks. This support is being provided initially for three years to facilitate investments by banks in technology, infrastructure and team building specialised in SME lending, after which SME financing by banks is expected to be sustainable without the SBP or government support.

Speaking about the collateral-free lending scheme, Finance Minister Shaukat Tarin said “the Ministry of Finance welcomes and supports this innovative initiative of the State Bank, which would enable SMEs wit­h­out collateral to access bank fina­nce. We look forward to seeing strong participation from commercial banks to take this initiative forward”.

The SME sector plays a pivotal role in Pakistan’s economy and is estimated to contribute 40pc to GDP and 25pc in export earnings.

“Despite this, SMEs find it difficult to access formal bank finance as SME financing stood at Rs444 billion as of March 31, 2021, which is only 6.6pc of total private sector credit,” said the SBP.

This is due to several reasons, including relatively higher loan losses, high-cost bank finance models, low usage of appropriate technology needed for SME finance and the lack of acceptable security. SMEs, therefore, often turn to exorbitantly expensive informal credit and face impediments to growth.

“Majority of SMEs in the informal sector that do not have collaterals are currently borrowing in cash or kind at rates of at least 25pc,” said the SBP, adding that this scheme was primarily targeted to such SMEs.

The central bank will provide refinancing only to those banks that desire to specialise in lending to the SME sector. Interested banks will be selected through a transparent bidding process to offer concessionary refinance facilities which would also carry partial risk coverage from the government.

Banks winning through this bidding process will need to invest in human resources; technology and processes to successfully develop expertise and capability to attract the SME finance market.

The banks offering the largest portfolio size and the highest number of borrowers will be selected for participation. The SBP will encourage banks that partner with Fintechs to provide an opportunity to innovative financing techniques in a cost-effective manner.

Published in Dawn, August 17th, 2021