KARACHI, Jan 4: Banks should play an effective role for growth of Small and Medium Enterprises as its share in business establishments in Pakistan is as high as 98 per cent employing over 78 per cent of the non-agricultural manpower in the country, said Governor State Bank Yaseen Anwar.

“In percentage terms, share of SME financing in the total lending portfolio of banks fell from 16.2 per cent in December 2007 to 7.7 per cent by September 2011. Clearly, this is not a very desirable situation,” he observed.

Presiding over the 4th meeting of the SME Credit Advisory Committee at SBP on Wednesday, he said a sustainable approach towards development of SME sector would require a more active role from all stakeholders, especially banks in improving availability of finance and other banking services for small and medium enterprises.

He stressed the banks to develop an effective SME strategy by focusing on important areas for a sustainable growth of the SME sector.

Mr Anwar said that growth of SME sector is critical for country's prospects of increasing employment, supporting productivity through greater business innovation and reducing income inequalities.

“The SBP on its part stands ready to support banks wishing to increase lending to this important sector with appropriate policy interventions,” he said and added that the State Bank has revamped its Credit Guarantee Scheme and various refinancing schemes with some encouraging results.

He, however, noted with concern that overall utilisation of these schemes is still below the expected levels, and it needs to be looked into seriously by the participating banks. “The review of SME Prudential Regulations has been completed after collecting feedback from relevant stakeholders and the revised PRs will be issued soon,” he added.

Expressing his dissatisfaction over decline of SME financing by banks, he said it was Rs437 billion in December 2007 which dropped to Rs268 billion in September 2011.

The SBP governor said that a broad analysis of banks' aggregate SME loan portfolio shows that a major share of total SME advances (ie 76 per cent) constitutes working capital loans which suggests reluctance on the part of banks to meet the long-term financing needs of the SME sector.

This has significant negative implications for both the drive for modernisation, expansion of businesses and process of asset formation by SMEs,” he added.

Mr Anwar said that the overall adverse macro-economic conditions have led to decreasing demand and lower SME lending.

“However, I feel that another major factor for this decline is banks' excessively cautious approach towards SME lending in the face of a difficult business environment,” he noted.

It was is not a sustainable situation, he said.