Govt approves 10-20% risk coverage for SME financing

The government has approved a new financing scheme for small and medium enterprises (SMEs), offering financial institutions a 10-20% risk coverage to share losses in case of borrower defaults. 

According to a State Bank of Pakistan (SBP) notification, this scheme aims to double the outstanding financing to SMEs to Rs1.10 trillion over the next five years, starting July 1, 2024.

The scheme aims to boost inclusive economic growth and employment by securing banks’ fresh exposure to SMEs. This will cover all types of loans, including working capital and long-term loans. 

Financial institutions, including commercial and Shariah-compliant banks, may offer up to Rs25 million to small enterprises (SEs) and up to Rs 200 million to medium enterprises (MEs) for a period of five years. 

Under the scheme, the government will absorb credit loss on the principal portion only, providing 20% first loss coverage for SEs and 10% for MEs. 

Eligible SMEs must meet the SBP’s SME finance prudential regulations, and banks will collect collateral against the loans as per these regulations.

Speaking at a recent conference, SBP Deputy Governor Saleem Ullah acknowledged the banking sector’s failure to adequately finance SMEs, which are vital to the domestic economy. Currently, SME financing is less than 4% of private sector credit, around Rs580 billion, despite SMEs contributing 40% to Pakistan’s GDP, 24% to exports, and 80% to employment.

He said that the SBP was conducting an SME census to facilitate loans for around six million SMEs in the country. The government will allocate budget funds for the risk coverage scheme to support this initiative.

The SBP notification also details the process for handling loans classified as losses and the payment of risk coverage claims. Banks will continue their regular recovery procedures, and recoveries from delinquent borrowers will be managed according to specific guidelines to ensure proper adjustments and allocations.