KARACHI, June 23: The SME sector which is the backbone of the economy emerged as more prone to default than the other sectors and got the second place, just below the corporate sector, in the list of defaulting sectors.

The SME (Small and Medium Enterprises) sector has been supported and promoted by present and previous Nawaz Sharif government as the base of economy and job provider on mass level.

Banks extended huge loans to the SME sector more than the agriculture sector, but the rate of default showed that the sector was not working up to the expectations.

The official figures showed that the during last three years, the SME sector proved more inclined towards defaults as its share in overall non-performing loans (NPLs) rose to 23 per cent at the end of 2006.

The SMEs share in total outstanding amount was 16.10 per cent while its share in NPLs reached 23.20 per cent till September 2006.

In 2004, the share of SMEs in total outstanding amount was 17.50 per cent and share in overall NPLs was 16.7 per cent. It showed that while the SMEs share in total outstanding amount remained almost same, its default rate increased substantially high during the last three years.

The corporate sector which has the highest share in total outstanding amount, 52.80 per cent, did not show much deviation from its share in the overall NPLs during the last three years.

In 2004, the share of corporate sector in overall NPL was 53 per cent and it reached 52.8 per cent in September 2006, which showed a slight decrease.

Agriculture sector default rate reached three times higher than its share in outstanding amount. The agriculture sector share in outstanding amount was 6.4 per cent while its share in NPL was 17.4 per cent till September 2006.

The default rate of agriculture sector significantly improved mainly because of more cautious lending to the sector and more participation by the commercial banks.

The cautious lending resulted in decline of the agriculture sector share in total outstanding during the three years while its default in terms of percentage also dropped.

In 2004, the agriculture sector share in total outstanding was 7.4 per cent while the share in NPLs was 25.3 per cent.

Bankers were of the view that supply of credit to the agriculture sector did not drop in terms of volume, but increased participation of commercial banks brought a real change which improved recoveries from the ‘politically influenced’ agriculture sector.

The first quarterly report of the banking sector indicated that the default rate has started increasing.

Analysts said if the default increased, the reemergence of the high default could pose a threat to the reasonably low credit default.

They also said that the low default rate helped the banks to increase their lending which was a vital catalyst for the economic growth of the country.