Role of Central Banks in Promoting SME Business Pakistan - case

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1 Role of Central Banks in Promoting SME Business Pakistan - case Syed Samar Hasnain Executive Director, Development Finance Group, State Bank of Pakistan

2 Central Banks Role in Pakistan SBP, like other developing and emerging economies, apart from traditional functions, performs developmental functions like promoting provision of credit to priority sectors of the economy as well as other allied activities. To look after the developmental functions, a dedicated group named Development Finance Group (DFG) is operating at SBP, with the objective to act as a focal point and coordinate all matters related to supply of financial services to priority sectors of the economy i.e. microfinance, SME finance, agricultural finance, infrastructure and housing finance. 2

3 SMEs - Significance and Contribution Pakistan SMEs contribute 30% in GDP, 25% in exports and 78% in the industrial employment. Of the total 3.2 million economic establishments, SMEs constitute more than 90%, with a predominant portion as sole proprietors. Less than 4% of SMEs currently avail loans despite about 40% have banking relationship Banks and Governments have started realizing the particular needs and preferences of SMEs. 3

Major Issues relevant to SME Finance in Pakistan Supply-Side Issues Banks risk averse approach Alternate liquidity deployment options High transactional cost of serving SMEs Lack of Financial

4 Major Issues relevant to SME Finance in Pakistan Supply-Side Issues Banks risk averse approach Alternate liquidity deployment options High transactional cost of serving SMEs Lack of Financial Products Innovation Demand-Side Issues Lack of satisfactory business plans, accounting and other information Inadequate assets for use as security Lack of financial awareness about different banking services General financial literacy 4

5 Central Bank s approach to promote SME Finance in Pakistan Creation of Enabling Regulatory Environment Market Development Facilitation in building Market Infrastructure Stake-holders Interaction 5

6 Specific Initiatives taken by the Central Bank 1. Separate PRs for SE and ME Financing cont: Revised PRs aim at improving the Regulatory Environment Importance of cash flow analysis and income estimation techniques Use of technology and documentation - disciplined credit control/ effective monitoring of credit Salient Features of revised SE PRs Separate loan limit of Rs 15 million for SEs Relaxation in the requirement of Audited Accounts for SEs: Less-cumbersome valuation process of securities, for securities valuing up to 5 million, evaluation may be made by the banks internal capacity General Reserve Requirement: 2% for unsecured and 1% for secured advances. Banks may visit SE clients according to their convenience, but at least one visit in a year. Stock report on semi-annual basis Insurance cover at banks discretion keeping in view the riskiness level of the borrower Recovery of loans: Easy Collection process; Banks can undertake cash collection/recovery of loans at places other than their authorized places of business. 6

7 Specific Initiatives taken by the Central Bank 2. Market Development Initiatives for SMEs: 1) Credit Guarantee for Small & Rural Enterprises. Rs 6 billion fund for Small Enterprises 40% risk coverage for loans under the scheme Almost 60% utilization by PFIs with NPL less than 3% Targeting new Small Enterprises, with av. loan size less than 1 million 2) Refinancing schemes for SMEs Modernization of SMEs; For SMEs in export sector; for constructing Silos; and for SMEs affected by flood and war Lower mark-up for end users ranging from 8-10% only. 3) Subsidy and Guarantee Facility for the Rice Husking Mills For Rice Husking mills of Sindh to undertake projects of BMR The end-user mark up rate for borrowers is only 2.75%. SBP and Government of Sindh (GoS) provides mark up subsidy of 6.25% and credit risk sharing facility of up-to 30% Exposure limits of Rs. 500 million have been allocated to 6 bank. 7

8 Specific Initiatives taken by the Central Bank 3. Capacity Development/Awareness Measures for Banks Conferences/workshops for Stakeholders Assisting banks in their capacity building in SME Banking. Major areas of focus are Credit Scoring, Strategy Formulation, Product Development, Risk Management and HR Development etc. Regular training programs/workshops for grass root level officials to higher management. Institutional Capacity Building via Technical Assistance programs Awareness sessions for different stakeholders through Focus Groups at various regions across the country. 8

9 Specific Initiatives taken by the Central Bank 4. Cluster Profiling Studies: There was severe lack of credible research data on important SME clusters that hindered development of effective strategies for the sector SBP has undertaken cluster development surveys, in partnership with reputed international and local institutions of important clusters The objective of these surveys is to help stakeholders, especially banks, in coming up with clusterspecific products and tailored SME banking strategies. Major areas covered under the survey include Market profile of the cluster, indicative business requirements, financial need assessment, cluster risk considerations, and indicative list of banking products both assets and liability. 1. Published: 1. Sale, maintenance and repair of motor vehicles and motorcycles, 2. Land Transport (Logistics & Passenger Traffic) 3. Education- Private sector schools and colleges 4. Health and Social Work Private sector hospitals 5. Textile Fabric, Glass & Ceramics Industry 6. Bakery & other confectionary products 7. Motor Vehicles and Trailers Auto parts manufacturing 8. Meat, fruit, vegetables, oils & fats 9. Grain mill products and animal feeds 10. Flour mills, Rice mills and Ginning etc 11. Fan Cluster Survey 2. Ready for Publication 1. Cotton Ginning 2. Marble and Marble Products 3. Plastic Products 4. Hand Made Carpet Manufacturing 5. Leather Products 6. Dry-cleaning and Laundry services 7. Beauty parlors and Spa 8. Super markets and retail shops 9. Printing Press 10. Gem & Jewelry 9

10 Specific Initiatives taken by the Central Bank 5. Secured Transaction Framework: i. The Framework will result in the following specific benefits:- It will enable SMEs to use their moveable assets as collateral to obtain loans from banks It will provide clear rules on priority for the secured creditors Cheap and simple recording and search of security rights Effective enforcement of security would boost creditors confidence. ii. SBP has hired the services of reputed legal firm to draft the Law, which after approval from Parliament will facilitate establishment of Movable Assets Registry in the country. 6. Active Coordination with stakeholders: i. 3S Working Group (SBP, SECP and SMEDA) three government arms ii. Focus Group on Islamic SME Banking iii. SME Credit Advisory Committee (SMECAC) iv. SME Consultative Group (SMECG) v. SME Focus Groups (in coordination with SBP-BSC) 10

11 Specific Initiatives taken by the Central Bank 7. Facilitating Government Initiatives - Prime Minister s Youth Business Loans Scheme The Prime Minister Youth Business Loans Programme (PMYBL) was launched in 2013 for promoting young entrepreneurship in the country. Major Objective of PMYBL is to provide loans to unemployed youth for establishing or extending business enterprises. Under this Scheme, loans will be provided through the banking system at service charges of 8% per annum for borrowers, while the rate of return for banks working as Executing Agencies (EAs) for PMYBL would be one year KIBOR+500 bps. Government of Pakistan (GOP) shall absorb the difference between the rate of return for EAs and 8% as mark up subsidy. GOP will also bear 5% of the losses on the portfolio of banks under the Scheme 11

12 Specific Initiatives taken by the Central Bank 7. Leveraging Branchless Banking for improvement in SME Banking i. Pakistan has one of the highest tele-density in the world where mobile phone subscribers have exceeded 120 million. ii. However, the number of deposit accounts and number of borrowers are only 32 million and 6 million respectively. iii. To leverage BB technologies for financial inclusion, specially to bring the Small and Micro Enterprises in the banking net, SBP is taking measures in the country. iv. Our BB agent network has crossed 41,000 that provides a significant opportunity for the BB providers to tap the huge market of small enterprises which may use either their mobile phone or agents locations to receive disbursements or to make loan installments to banks with convenience. 12

13 SBP IFC Coordination 1. Advisory Services for diagnosis of banks and revamping of SME Strategy 2. Preparation of market Segmentation Studies 3. Holding of Capacity Building Sessions Conferences, Seminars, Workshops 4. Round Table Meetings with Presidents/CEOs of banks 13

14 Thank You 14

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