KARACHI: Despite government promises of bank financing with risk coverage, experts believe small and medium enterprises (SMEs) are unlikely to see an increase in funding during the current fiscal year. Sources within the banking sector indicated on Saturday that the unfavorable interest rates and the government’s own liquidity challenges are major obstacles.
The government, facing a liquidity crunch, is expected to borrow Rs9.3 trillion for deficit financing in FY25, leaving little room for increased SME financing. “Given the current situation, banks are unlikely to extend more financing to SMEs, which could negatively impact overall economic growth,” a senior banker commented.
Earlier this month, the government launched a Rs1.1 trillion initiative aimed at boosting SME growth and job creation. This plan is part of broader efforts by the government and the State Bank of Pakistan (SBP) to double SME financing to Rs1.1 trillion and increase the number of borrowers to 150,000 over the next five years.
However, the 20% risk coverage provided to banks under this scheme has failed to convince them to lend at the still-high interest rates. Banks have been prioritizing investments in government securities, with lending to the federal government reaching a record Rs8.5 trillion in FY24. The unprecedented 22% interest rate has significantly boosted bank profitability, further reducing their incentive to finance SMEs.
Financial experts argue that the government’s efforts to persuade banks to increase SME lending have been ineffective, primarily due to the liquidity constraints. Additionally, the government is expected to reduce the Rs1.4 trillion Public Sector Development Programme for 2024-25 by as much as Rs200-400 billion, further limiting fiscal space.
In response, the SBP has formed a task force in collaboration with the Pakistan Banks’ Association to develop practical recommendations for enhancing SME financing. This includes defining SMEs and creating a credit coverage mechanism. Currently, less than 5% of commercial lending goes to the SME sector, which is crucial for economic growth. Experts warn that as long as high interest rates and profitable government securities remain, banks are unlikely to shift their focus to SMEs.
The SBP recently emphasized that improving access to finance for SMEs is a government priority, urging banks to develop digital financing solutions for SME supply chains.
