The non-performing loans (NPLs) of small and medium enterprises (SMEs) sector have crossed Rs 100 billion mark as the economic slowdown followed by energy crisis and deterioration in security situation is hurting the major sectors of the economy. The small and medium enterprises (SMEs) are considered engine of economic growth in any country due to employment generation, contributing in equitable distribution of wealth, and fostering entrepreneurial culture.
According to the State Bank of Pakistan (SBP), NPLs of SME sector rose by Rs 4.6 billion during the first quarter (Jan-March) of current calendar year 2011 and surged to Rs 101.1 billion as on March 31, 2011 from Rs 96.5 billion at the end of December 2010. However, as a result of a stronger rise in NPLs of the overall banking sector, the share of SME NPLs in total dropped from 19.4 percent in Dec-2010 to 17.9 percent in March 2011.
According to SBP, a closer look at the behaviour of SME sector''s NPLs shows that there has been a consistent rise since March, 2007 mainly attributed to economic slowdown, intensification in energy crisis and deterioration in security situation.
At rise in NPLs of SMEs by 4.7 percent during the last quarter, banks have shown cautious lending behaviour. As a result, SME sector''s outstanding credit posted a decline of 9.3 percent quarter-on-quarter (QoQ) basis and overall outstanding credit stood at Rs 303.4 billion, constituting about 8.6 percent of total outstanding banking portfolio, which includes corporate, SME, agriculture, consumer, commodity and others.
According to SBP, credit flow to SMEs has been declining since 2008 (after the liquidity crunch) as banks diverted funds towards less risky commodity operation of the government as well as investing in T-bills. In addition, high interest rate, rising inflation, energy shortage, and gradually increasing energy costs have also dampened the demand for bank credit by SMEs. Consequently, the number of borrowers in SME sector declined by 6.4 percent at the end of March 2011.
At the end of March 2011, total number of SME borrowers stood at 197,808, constituting about 5.2 percent of the total number of outstanding borrowers of the banking industry and recorded a quarterly decline of about 6.4 percent. However, according to SBP, it is a source of concern that the decline in number of SME borrowers is significantly higher than the overall reduction of 2.1 percent in the number of borrowers of total banking industry. Out of the total SME borrowers, about 89 percent availed working capital finance, 5 percent fixed investment, and 6 percent trade finance.
In the same way, an analysis of loan size-wise borrowers manifests that 71 percent of total SME borrowers fell under the bracket size of up to Rs 0.5 million followed by over Rs 0.5 to 1 million, Rs 1 to 2 million, Rs 2 to million, and over Rs 3 to million had a share of 8.2 percent, 6.5 percent, 3.1 percent, and 3.5 percent respectively.
At the end of March 2011, a sector- wise break-up shows that the fall in outstanding amount in overall SME finance was driven by a fall in lending to manufacturing and trading sub-sectors. In contrast, services sub-sector showed remarkable resilience and outstanding amount under this sub-sector posted a rise of 4.5 percent on QoQ.
Tenor-wise breakup of the total SME outstanding amount showed that the dominating share of about 76.1 percent was availed by SMEs under the category of short term financing (up to one year), while the share of long and medium term financing was 15.5 percent and 8.4 percent respectively. At the end of March- 2011, SME financing for all tenors declined relative to the preceding quarter; however, the impact was more prominent in the case of medium term financing.