The government has come up with a new 2021-2025 policy for small and medium enterprises (SME). Federal ministers claim it will bring about “a revolution” in the SME sector and the entire economy.
The last census of economic establishments was held in 2015-16 and the official results of it are yet to be shared. The latest estimate of Small and Medium Enterprises Development Authority shows 5.2 million micro, small and medium enterprises of MSMEs were operating in 2020, accounting for 98.6 per cent of all enterprises. So, when the federal ministers say there are around 5m SMEs, they are actually referring to all MSMEs and not just SMEs. (SME Policy 2019 and SME Action Plan 2020 had suggested defining all MSMEs as SMEs based on the upper thresholds of annual sales instead of the worth of their fixed assets or the number of their employees).
The SME sector (read the entire 5.2m MSMEs), according to the government’s own estimates, contributes 40pc to GDP and accounts for one-fourth of total exports. Naturally then, this sector must get a large chunk of banks’ financing.
As part of the policy, venture capital regulations will also be eased to pump equity finance into eligible SMEs, including those in the IT sector
But that has not been the case. According to the State Bank of Pakistan (SBP), banks’ lending to the SME sector equalled less than 8pc of their total lending to the private sector businesses (PSB) as of October this year. And, the number of SME borrowers remained below 200,000 till the end of 2020. (The percentage of SME loans in banks’ overall lending to PSB and the total number of SME borrowers both speak volumes about the plight of this sector).
Under the new SME policy, banks will provide collateral-free loans of Rs10m each to 30,000 new SMEs at a concessional interest rate of 9pc. Besides, the Rs23.5 billion fund has been allocated to bail out loss-making SMEs by picking up 40pc to 60pc of their losses depending upon the risk coverage amount. As part of the policy, venture capital regulations will also be eased to pump equity finance into eligible SMEs, including those in the information technology (IT) sector. But these measures, even if implemented with celerity, can hardly enable all SMEs to operate profitably and expand their operations.
The SME Aasan (easy) Finance Scheme (SAAF) introduced by SBP in August this year is the basic tool of implementation of new SME policy. And one good thing about SAAF is that unlike previous schemes it doesn’t build castles in the air. SAAF refinance facility is meant for only those banks that “desire to specialise in lending to the SME sector,” the SBP says.
This point is important. Actually, most banks neither have the “desire to specialise” in SME lending nor they have built the required capacity to cater to SMEs as viable borrowers. As a result, the percentage of SME loan defaults remains high giving banks an excuse for not servicing the SME sector enthusiastically. If banks start building this capacity right now and also convince themselves that in future enough net interest income can be generated from SME loaning, only then the new SME policy can be a real success. No amount of interest rate subsidy offered to banks through a refinancing scheme can achieve this objective.
What proves this point is the below 8pc share of SME financing in banks’ overall lending to private sector businesses, despite the introduction of several refinancing schemes since 2007 when the first SME policy was introduced.
The new SME policy promises the provision of 19,500 plots (spread over 4200 acres of land) to eligible small and medium entrepreneurs on easy instalments. This is a good idea especially if the bulk of the land is allocated to high-priority future SMEs like those in the IT and IT-enabled services sector or agricultural innovation. And, it may start yielding the desired results if not immediately — then sometime before the new SME policy expires in 2025.
A special feature of the new SME policy is its focus on supporting ladies-led SMEs which would get a 25pc tax rebate in addition to all other facilities promised in the new SME policy. But to promote women-led businesses, particularly in the SME sector, offering subsidies and tax-rebates is not enough; ensuring that women actually come forward to set up businesses and they actually get special incentives is more critical.
Back in August 2017, the central bank had launched a refinance and credit guarantee scheme for female entrepreneurs. In August 2020 it enhanced the refinance and credit guarantee limit under this scheme from the initially-envisaged amount of Rs1.5m to Rs5m. But then what happened? The central bank owes it to the nation to share the results of that scheme with the nation with all important details — like the number of women entrepreneurs who got this facility, the total amount of refinancing and credit guarantee offered to them and the sectoral and geographical breakups of the beneficiary businesses.
There are two general reasons for the failure of any initiatives aimed at promoting SMEs, or for that matter any other segment of borrowers. One is that the details are not shared with the public thereby blocking a deeper discussion on why a certain scheme did not work — and the other is that responsibilities are not fixed in case a scheme fails. Did we ever hear enough from the policymakers why the SME policy of 2007 did not deliver? Or did we hear how much it did deliver and where it failed and why?
Published in Dawn, The Business and Finance Weekly, December 27th, 2021