When the PDM government assumed power, the then finance minister Miftah Ismail discarded almost all concessionary financing schemes doled out during the PTI term by the finance ministry and SBP. The motive seemingly appeared political. PDM brushed all schemes with the same stroke without assessing the risk and financing elements.
There were three prominent schemes. Mera Pakistan Mera Ghar, Kamyab Jawan, and SME AsaanFinance scheme. The housing scheme was well received and targeted at low- and middle-income houses. However, its financing and risk were highly skewed toward the government of Pakistan. That required some tweaking and adjustment. It should have been relaunched with a new design. On the other hand, Kamyab Jawan was politically motivated. It was too ambitious and assumed too many risky flaws.
The fiscal reasons were enough to revisit Mera Pakistan and MeraGhar, and KamyabNojawan schemes. The risk was high, and financing subsidies and credit guarantees all were provided by the government of Pakistan. There is no fiscal space for such schemes. It made sense to reduce the size of these schemes.
On the other hand, the SME SAAF scheme was the need of the hour. There was no political pressure on it. The only political thing was in its name which rhymed with Insaaf. Perhaps, Miftah didn’t like it. He could have renamed it.
However, in the case of SAAF, the scheme was conceived, designed, and executed by the central bank. The rationale of this scheme was economic. SME lending is too low in Pakistan for a host of reasons. SMEs are engines of economic growth. Literature suggests a strong correlation of economic (and job) growth to SME lending globally.
The problem in Pakistan is very high lending rates, absence of collateral, and lack of formal documentation in the SME sector which hinders banks to assess cashflows. However, over the period, with enhanced digitization of payments in the value chains, the opaqueness of cash flows in the SME businesses has significantly reduced. That is why some banks by themselves or with fintech partners were willing to offer cashflow-based uncollateralized lending products in the supply chain of food, consumer, engineering, and other sectors.
The financing is pacing up, albeit at a slow pace. One big impediment is the high-interest rates charged on SME lending. SBP came up with the idea of providing a refinancing scheme to SMEs at a maximum rate of 9 percent. SBP was providing refinancing at 1 percent with up to 8 percent margin to be charged by banks. There was a credit guarantee (first lost 20-60%) to be financed by the ministry of finance.
The scheme was well received by the commercial banks. SBP was expecting banks to bid for Rs40-50 billion; but the response was overwhelming. SBP approved Rs80 billion from eight banks. With a 60 percent share with three banks – HBL, Meezan and Bank Alfalah. All three are serious in lending to SMEs. The loan limit was fixed at Rs10 million per party.
The scheme was good, and loans were being disbursed before the scheme was halted. The apparent premise was that the government does not have fiscal space to give credit guarantees. Well, with maximum loan size of Rs10 million, maximum exposure of guarantees (first loss 20-60%) is computed at Rs16 billion. Not a big amount. Even if that is the stumbling block, SBP can restart the scheme without the credit guarantee scheme.
The spread with the banks in the scheme is at a lucrative 8 percent and banks are ready to assume the risk of default without guaranteed coverage as there is enough compensation against the risk. And some banks have their own schemes at market rates with no guarantee. At lower rates, such schemes can scale up.
Some were saying that IMF has a problem with refinancing schemes. The IMF issue is generic and has nothing to do with this specific scheme. All IMF wants is not to have relatively too low rates for such schemes, as these can undermine the monetary policy efficacy and potentially overheat the economy. IMF reservation were more towards schemes such as LTFF, ERF and TERF.
In the case of SAAF, SBP can increase the refinancing rate by linking it to the KIBOR. It should end the subsidy element of credit guarantee from the government. Restarting the scheme is imperative for providing much-needed liquidity to SMEs in a tough economic environment.
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