SMEs' appetite for bank credit growing
Credit-worthy small and medium enterprises are now getting fresh loans a bit more easily as banks are encouraged to lend more mainly by falling loan infection ratio and promising business generated by this vital sector.
Net lending to the SMEs has now turned positive after having remained negative till two years back. The lenders see bright prospects of growth in SME financing on the back of a 4pcplus economic growth in the last two fiscal years and possibility of a slightly higher growth during this year. They say if the SMEs get themselves regularised as a result of the ongoing documentation drive, the bank financing to the sector should grow more.
The most impressive performance is of Islamic banks whose SME financing has more than doubled in FY15. Between September 2013 and September 2015, net fresh bank financing to SMEs totalled Rs26bn, breaking an earlier two-year spell of net negative loaning. In the comparative period of 2011 and 2013, the net fresh lending had rather contracted by Rs42bn, dragging down the outstanding stock of advances from Rs278bn to Rs236bn.
Meanwhile, loan infection ratio of the sector has fallen from 38.7pc in September 2013 to 31.6pc in September 2015 which raises hopes for further increase in credit. Bankers attribute larger lending to such key factors as rise in credit demand by enterprises and upgrading of a number of SMEs from 'not credit worthy' to 'credit worthy' category.
Also, the updated SBP guidelines enabled banks to lend more with improved chances of recovery in a growing economy.
Bankers also note three positive developments. First, many SMEs have straightened their financial management which reduced their loan infection and made them eligible for fresh working capital.
Second, SMEs in food processing and packaging, dairy and milk, electrical and electronic appliances, agricultural and livestock, farming tools and machinery, construction materials, iron and steel and paper and packaging materi- als have expanded their production operations creating demand for long-term loans. And third, service sector SMEs have shown a great appetite for bank funds.
However, the latest SBP quarterly report on development finance shows that despite some improvement in SME financing, the growth in lending is very low, about 3.2pc in FY15.
The report indicates that the SMEs in service sector (account for 23pc of total SME loaning) are more promising in nature. Bankers also say they have entertained credit requirements of a wide range of service providing SMEs, from business contractors particularly in construction industry to distribution companies especially those dealing with FMCGs to call centres to eateries to IT start-ups to online marketing companies.
The SME lending of banks is, however, far from being evenly distributed. Whereas the state-run banks are doing well in this area mainly due to accommodating spill-over credit demand of government-sponsored schemes and packages, the local private banks are still too cautious, the SBP report reveals.
The most impressive performance is of Islamic banks whose SME financing has more than doubled in FY15. Executives of Islamic banks link it to a fast growing pro-Shariah bias of SME borrowers and the fact that they are marketing financial products quite aggressively.
"Besides trading and services, SMEs need more of revolving funds and Islamic banks are liquid enough to keep re-employing short-term funds particularly in the absence of a fullyfledged Islamic inter-bank money market," says a senior executive of Meezan Bank.
A few months ago, the SBP issued a questionnaire for obtaining a complete picture of SME lending by banks. "The findings of this survey are being finalised, but initial compiling throws enough light on what is missing where and how the gaps can be filled in wide areas of operations ranging from bank processes of credit approval to branch level human resource involvement."
An official of the Sindh Bureau of Statistics (SBS) told this writer that the SBP and the bureau are likely to sign an agreement whereby its human resources will be used to assess credit requirements of manufacturing SMEs of the province.