The government has approved a new financing scheme for small and medium enterprises (SMEs), providing a risk coverage of 10-20% to financial institutions to share their losses in the event that borrowers default on repayments.
According to a State Bank of Pakistan (SBP) notification on Thursday, the risk coverage scheme aims to double the outstanding financing to SMEs to Rs1.10 trillion over the next five years, starting July 1, 2024, compared to the current financing to this critical sector of the economy.
The notification states that financial institutions, including all commercial and Shariah-compliant banks, may offer up to Rs25 million to small enterprises (SEs) and up to Rs200 million to medium enterprises (MEs) for a period of five years. “All types of loans, including working capital loans/running finance and long-term loans, will be provided to SMEs through the scheme,” it reads.
It adds, “The government will absorb credit loss (principal portion only) on the banks’ fresh exposure against SMEs, providing 20% first loss coverage against banks’ fresh exposure to SEs and 10% first loss coverage against banks’ fresh exposure to MEs.”
The notification highlights the critical importance of SMEs in inclusive economic growth and employment creation. Consequently, the government of Pakistan, on the recommendation of the SBP, has approved a risk coverage scheme to secure banks’ fresh exposure against SMEs.
Only SMEs that meet the SBP definition of SME finance prudential regulations will be eligible for bank financing. Additionally, banks will collect security (collateral) against the loan from SMEs as per the prudential regulations.
Speaking at a conference last week, SBP Deputy Governor Saleem Ullah noted that the country’s banking system, including the central bank, has collectively failed to provide the necessary financing to the SMEs sector, which is the backbone of the domestic economy.
He said the outstanding financing to the SME sector remains less than 4% of private sector credit, around Rs580 billion. The SME sector’s share in Pakistan’s GDP is 40%, with 24% in exports and 80% in employment nationwide.
The banking sector regulator, SBP, failed to introduce SME-friendly financing policies. Now, the central bank is conducting an SME census to enable banks to issue loans to around six million SMEs in the country. He added that the government will allocate budget funds for risk coverage facilities through a specialised scheme.
The SBP notification further states that SBP will allocate risk coverage limits to each participating financial institution (PFI) against fresh SME finance.
Loans classified as loss based on the time-based criteria mentioned in SBP prudential regulations for SME finance for SEs and MEs will be considered as the defaulted portfolio for the purpose of payment of claims against the risk coverage.
Payment of risk coverage claims will not prevent banks from the right of recovery of the defaulted amount. Banks will continue with their regular procedure for recovery of loans. The recoveries from delinquent borrowers may be treated in three ways; First, a bank receives recovery from delinquent borrowers and has pending subsidy claims with SBP under the scheme. In this scenario, the bank may adjust the recovered amount from the quarterly claims by netting it off from the risk coverage claims.
Second, a bank receives recovery from delinquent borrowers and has no pending subsidy claims with SBP under the scheme. In this case, the concerned bank will deposit the recovered amount with the Financial Inclusion Support Department (FISD)-SBP-Banking Services Corporation (BSC). FISD will adjust it with any other bank having pending risk coverage claims under intimation to SME Housing & Sustainable Finance Department and Finance Division.
Third, in cases where all the banks submit nil claims, the recovered amount will be deposited in a child account “miscellaneous account (FG MISC)” under central account non-food 1 on a quarterly basis under intimation to Finance Division.
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