Financing scheme for SMEs

The government has been talking about the vital role of Small and Medium Enterprises (SMEs) in the economic development of the country in the recent past almost continuously.
In order to provide adequate finance on easy terms to vitalise this sector, the State Bank of Pakistan announced last week (14th May) a new long-term loaning scheme for small and medium enterprises to facilitate purchase or import of machinery against bank loans, the return of which would be based on one to three years treasury bill rates.
The scheme is being specifically introduced to support capacity development of exporters in the SMEs sector and would be available for both existing and newly established industries.
Loans under the scheme would be available in Pak rupee and could also be repaid in local currency.
This would provide a hedge to the borrowers against currency rates fluctuations. Loans will also be allowed for technology upgradation and consultancy charges and this facility would be available for a period of seven-and-a-half years.
For the first time, intangible securities like brand names acquired and franchise holding, would also be acceptable for advances.
During a luncheon meeting with the Executive Committee of Small and Medium Enterprises Associates (SMEA), the State Bank Governor also clarified certain related matters.
All the relevant quarters were taken into confidence and it took one year to develop consensus among all concerned on the initiative. As the scheme is exclusively meant for SMEs, sectors like spinning and weaving would be excluded from the new lending facility to keep the big fish away.
So for the first time two sectors of prudential regulations would be in place in the country, one dealing with big business and the other with SMEs separately.
The present effort of the State Bank to invigorate the SMEs, is commendable because of the healthy impact it is going to have on balanced growth, employment generation and poverty alleviation.
The development of SMEs can also go a long way in ensuring that fruits of development are evenly distributed between various regions and social segments of the society.
In the overall national context, energising of SMEs could really propel growth and lower social tensions.
The scheme offered by the State Bank would, we are sure, go a long way in alleviating the financial constraints of SMEs by offering them loans on easy terms and for a longer period.
Acceptance of some non-tangible collaterals and the borrowings and repayment of the loans being in local currency to do away with the need of costly foreign exchange hedge, are highly attractive features of the new scheme which would take care of most of the financial worries of SMEs.
It would have been even better if the expected returns and cash flow, rather than some kind of collateral, would have been made the basis of granting loans.
However, while appreciating the new facility, it needs to be pointed out that the country cannot exploit the full potential of SMEs unless other major irritants are removed to facilitate their growth.
In fact, in the current environment when banks are having excess liquidity at their disposal, financial accommodation was not a big problem.
Irrational and outdated labour laws, and a plethora of monthly payments and filing of returns under Social Security Education Cess scheme along with provincial levy of professional tax, monthly boiler and electricity fees and annual labour and safety inspections, not only are burdensome but also provide an open licence to the lower hierarchy of the government to harass the small entrepreneurs.
These irritants are proving a great hindrance to the development of SMEs, which unlike big business, cannot keep full time professional staff to tackle them and meet the legal obligations.
We have been repeatedly advising the government to raise the bar from ten to 100 employees under the Shop and Factories Act and the Industrial Relations Ordinance.
Another obstacle is the collapsing infrastructure which is both inadequate and unreliable to meet the industrial requirements.
At times, it becomes an embarrassment to take a foreign visitor to the place of business because of bumpy roads and load shedding of electricity.
It is perhaps no use talking about deteriorating law and order situation and poor governance which, to some cynics, now appear beyond the power of the government to improve. No investor would like to set up a business where physical and financial safety is not assured.
In the existing situation, we are afraid, a major breakthrough in the growth of SMEs is not likely to be achieved unless the government also moves decisively to remove the impediments in these areas.