SME Sector: banks step child?

Back in 2008, the banks and DFIs operating in the country seemingly began steering clear of Small and Medium Enterprises (SMEs). That trend did not change through 2012.
With banks growing disinterest in the sector, the share of SME financing has reached its lowest - 6.8 percent in 2012 which is almost half the share the sector was enjoying back in 2007.
More depressing is the fact that the banks that dare to finance the SME operations prefer advancing short-term loans.
According to the recent Development Finance Review issued by the SBP, the working capital loans advanced to the SME sector grew from 77 percent in 2008 to 80 percent in 2012, while fixed investments dropped from 12 percent to 10 percent during the same period.
Trade finance also shrank from 16 percent to nine percent during the period.
Banks shyness from increasing their penetration in SME financing stems from growing delinquency rates in SME financing portfolios in the recent years.
A glance at the SME infection ratio which jumped from 16 percent in 2008 to 36 percent in 2012 definitely raises eyebrows. That is one reason perhaps why the banks are so reluctant to lend to SMEs, as the crippling energy crisis has made matters worse for smaller firms to repay on time, if at all.
On the flipside, the drop in SME financing over the years might also be attributable to demand-side factors such as increase in discount rate since 2008 and stricter collateral requirements which rendered SMEs incapable of knocking on banks doors.
Floods might be another demand side holdup. The floods in Sindh and Punjab in two consecutive years of 2010 and 2011 wiped out many small-sized units which had few resources to rebuild and revitalise their businesses or at least allow them to qualify for the collateral requirements to acquire loans.
According to market sources, most of the SMEs in Pakistan are either equity financed or informally financed. This is despite the proven fact that the lack of finance from formal sources has been one of the major hurdles in the development of the sector to its real potential in most of the developing economies.
SBP is taking viable steps to boost SME credit. The Credit Guarantee Scheme initiated by SBP is considered to be a great stride in this regard. The scheme targeted 105 districts nation-wide with loans sanctioned to the borrowers who are creditworthy, but cannot fit into the usual credit parameters of banks, especially when collaterals are required.
More schemes as such are expected to turnaround the industry fortunes. Besides, with the budget to be announced soon, the sector is pinning hopes on the perceived business-friendly government to entail some bold policy measures to buttress the SME sector contributing around 40 percent to GDP.