Banks ignore non-traditional SMEs A very few small and medium enterprises seen as eligible for credit by banks are regular borrowers of lending institutions.
But majority of SMEs still get little or no financing and rely either on their own resources or resort to expensive, informal borrowing. The State Bank’s efforts to accelerate lending to SMEs have yielded very limited results.
By the end of CY15, about 158,400 or 5.3pc of all SMEs had regular access to bank finance if the oft-quoted estimated number of 3m SMEs is taken on face value. How the remaining 94.7pc manage their funding remains a subject of speculation and academic research.
Those that are not linked with big established businesses in the trading, agriculture or manufacturing sectors don’t get enough attention by banks, a number of studies have revealed
Bank financing to SMEs remains concentrated in the traditional and profitable sub-sectors of agriculture, services or manufacturing.
“The banks could have explored lending opportunities in some non-traditional areas but there are no signs to suggest they are doing this seriously,” admits a senior official of one of the top five banks.
Lots of SMEs are now operating successfully in new segments like online trading and cash-on-delivery businesses, or in the modern agricultural arena of dedicated crop management and marketing, or in smaller segments of manufacturing like furniture making. But banks continue to ignore most of them.
Even amongst old SMEs, those that are not linked with big established businesses in the trading, agriculture or manufacturing sectors don’t get enough attention by banks, a number of studies have revealed.
Banks often argue that a higher level of non-performing loans by SMEs makes them shy of lending, though the infection ratio of SME loans has been on a gradual decline for the past several years. In CY15, an 11pc decline was recorded, according to SBP stats. Central bankers take pride in the fact that after the issuance of a set of guidelines for SME financing, bank loans to SMEs are repaid more frequently on time.
What actually holds banks from lending more to SMEs is their inability to innovate, reluctance in taking calculated risks and, above all, a lack of will to come out of their comfort zones, central bankers say privately. But SBP periodical reports on SME financing never make such candid remarks and are filled with data to support the view that things are improving.
One area of improvement that cannot be ignored, however, is that banks have lately increased the share of fixed investment in the pie of their SME lending portfolio. In CY15, for example, 23pc of SME lending was for fixed investment, much higher than 13pc in CY14. SME financing by Islamic banking, recorded a sharp rise last year.
Central bankers say a gradual uptick in the share of fixed investment lending started several years ago, but the jump seen in CY15 has the potential of becoming a trend as banks have started capitalising on a balancing, modernising and rehabilitation drive seen in SME sectors.
This BMR spree itself has sprung up from an expansion in the domestic economy and from SMEs’ vision of a sudden burst of business activity once CPEC-related projects start creating a ripple effect in the economy.
Businesses that have taken a different shape during this century are out of the bank’s radar. Take, for example, the ongoing transformation of the business of sacrificial animals. Hundreds of entrepreneurs now sell online tens of thousands of sacrificial animals on every Eid-ul-Azha and a large majority of them rely on pooling in money from a select group of investors or crowd financing.
“But no bank is willing to finance their business (primarily buying of sacrificial animals from cattle breeders or from wholesale markets a few months ahead of the festival),” laments Hassan Naqvi of Karachi. He, along with his friends, has been involved in this business for the past 10 years and the group carries out all activities under a registered trading company.
“Every year, we meet officials of banks to see if we can borrow from them. But their standard answer is no,” he says.
Financing of tech start-ups, almost all of them in the SME sector, is also a case in point. Thousands of well-educated computer savvy youngsters are engaged in development of mobile phone apps and websites for various purposes including education, entertainment and business. Over a dozen of them have made their presence felt so strongly in the virtual world that they are attracting sizable funds from overseas Pakistanis or foreigners or even from multilateral lending agencies.
“But our own banks don’t come forward to finance businesses of this non-traditional category of SMEs,” complains Ms Raza who works for a Dubai-based high tech company that produces modern marketing stuff (creative designs, logos, and contents) for local and multi-national companies operating in Pakistan and the GCC region.
In the recent past, lending to SMEs in the education sector has taken off. And, according to bank executives they have been lending to private sector schools, colleges and universities. They, however, frankly admit that the bulk of such lending still goes to a handful of high-end, well-established networks of schools and colleges. Banks don’t entertain loan requests of equally big networks of coaching and skill enhancement centres spread across the country, owners of such networks say.
“In Karachi alone, hundreds of large-size coaching and skill-enhancement centres are operating but not even a few of them have been able to get bank financing,” laments an official of a Karachi-based computer and multimedia training centre.
“Our annual earnings from just one of the several branches in Karachi are in the range of Rs3-4m and we’ve been in this business for more than a decade. But not a single bank entertains our borrowing request and whenever we go for expansion we use up our savings.”