ISLAMABAD: State Bank of Pakistan (SBP) is likely to provide refinancing of Rs 60 billion to Small and Medium Enter prises (SMEs) in three years under refinance and credit guarantee scheme for collateral-free lending, sources in Finance Ministry told Business Recorder.
Sources said the Prime Minister chaired a progress review meeting on priority sectors on March 18, 2021. During this meeting, he gave directions to submit proposals for credit/financing for SMEs to the Economic Coordination Committee (ECC) of the Cabinet for consideration.
In this regard, the State Bank of Pakistan (SBP) drafted a scheme titled “refinance and credit guarantee scheme for collateral free lending to SMEs’’ to facilitate SMEs which do not have collateral to get financing from banks. The scheme involves risk sharing subsidy from the Government of Pakistan.
The sources said, Ministry of Industries & Production, in a letter on April 22, 2021 stated that the schemes/proposals related to banking, investment and State Bank of Pakistan fall under the purview of Finance Division, in terms of entry 11, Serial 12, Schedule-II of Rules of Business, 1973 with the request that draft summary for ECC may be initiated by the Finance Division, being the relevant Division.
Finance Division, in its summary stated that SME sector plays an important role in the economic growth of a country. As per SMEDA estimates, there are approximately 5.2 million economic establishments in Pakistan out of which the largest proportion is of SMEs.
Finance Ministry argues that due to their significant share in total business establishments, importance of SMEs cannot be denied. The SME sector contributes 40% to GDP and 25% to exports.
However, access to finance, amongst other limitations, continues to remain a challenge for SMEs in Pakistan in achieving their potential. This is in part due to higher loan losses, larger intermediation costs, lack of appropriate lending technology for retail lending, acute information asymmetry, collateral deficiency and SMEs desire to operate in the informal sector. The banks, therefore, are reluctant to lend to SMEs.
In order to address this issue, SBP after extensive deliberations with the relevant stakeholders, including banks, developed a scheme titled “refinance and credit guarantee scheme for collateral free lending to SMEs.” The scheme envisages partnering with selected banks through a transparent procedure to enable them to offer collateral-free financing to SMEs.
Under the scheme, SBP will provide refinancing of around Rs. 60 billion in three years at 1% which will be used by the partner banks for extending financing to SMEs at 9%, thereby providing a spread of 8% to banks. This will encourage banks to justify their initial investment in systems and personnel.
Maximum loan size under the scheme will be of Rs 10 million. One of the attractive features of the scheme is the provision of up to 60% risk coverage by the GoP to banks on their financing to SMEs.
The total financial impact of the proposed risk sharing facility to the GoP has been worked out to the tune of Rs.25.84 billion to be provided to SBP for onward payments to banks over four years as per following details: (i) FY 2020-21, no allocation required; (ii) FY 2021-22 Rs 1.19 billion; (iii) FY 2022-23 Rs 6.24 billion; (iv) FY2023-24, Rs 11.06 billion; and (v) FY 2024-25 Rs 7.35 billion.—MUSHTAQ GHUMMAN