KARACHI: Some eight banks have been selected for the Unsecured Small and Medium Enterprises (SME) Loan Program, first launched by the State Bank of Pakistan (SBP), to facilitate the Small and Medium Sized Sector Businesses (SMEs) to obtain credit from banks.
SMEs faced a number of difficulties in obtaining credit from banks; that is, the lack of guarantees and the high delivery costs which are considered to be the biggest challenges. In order to overcome these challenges in an innovative way, the SBP adopted a new approach in which interested banks were invited to bid for a subsidized facility with risk coverage.
Under this program, SBP will provide three-year time-limited refinancing to selected banks through a transparent bidding process. After three years, the banks will repay the refinanced amount in ten equal annual installments.
The risk coverage will however be valid for a period of four years from the launch of the device, in order to adequately cover the loans granted during the third year of the device.
This is the first time that a comprehensive unsecured SME loan program has been introduced by SBP in the country. Of the 20 banks that competed to participate in this program, 8 banks in four categories were selected based on the highest amount of funding and the highest number of SME clients to serve.
SMEs are likely to get unsecured loans of Rs60bn
These categories include large banks, mid-sized banks, small banks, and banks in conjunction with fintechs. The winning banks are Habib Bank Ltd, United Bank Ltd, Allied Bank Ltd, Meezan Bank Ltd, Bank Alfalah Ltd, The Bank of Punjab, JS Bank Ltd and The Bank of Khyber.
These banks were selected through a transparent tendering process based on prescribed criteria. While appreciating the enthusiastic response from the banks, Dr Reza Baqir, Governor of the State Bank, highlighted the rapid roll-out of the program by the banks. He also stressed the importance of deep awareness and marketing of the program for SMEs to fully utilize its benefits.
State Bank of Pakistan (SBP) Governor Dr Reza Baqir said banks have reacted overwhelmingly to an innovative financing program for unsecured loans to SMEs introduced by the State Bank and supported by the government of Pakistan.
Access to finance for SMEs remains low in Pakistan due to a number of factors including lack of collateral and perceived high risk due to non-availability of track records. To address these issues, SBP took an innovative approach by designing the Asaan Finance SME, commonly referred to as SAAF, which refers to the unsecured nature of finance. The SAAF was developed after extensive stakeholder consultation.
To implement this program, the SBP decided that instead of advising all banks to offer this product, only willing banks will be encouraged to be part of this initiative and develop their expertise through a transparent process. The SAAF was launched in August 2021 and offers have been solicited from interested banks.
Under the SAAF, the SBP will provide refinancing to banks at 1% per annum (pa) for subsequent loans to SMEs at a maximum end-user rate of up to 9% pa The end-user rate in the SAAF framework would be attractive to SMEs compared to a typical cost of financing for them from informal sources ranging from 25% to 50% per year
The margin available to banks will help them make an initial investment in human resources, technology and processes to meet the promotion of SME finance. This incentive was provided to banks during the first three years of this program, after which it is expected to become self-sustaining. In addition, under SAAF, risk coverage of up to 60% is provided by the Government of Pakistan.
SBP launches an âinnovativeâ financing program for SMEs Asaan
Under the SAAF scheme, SMEs can benefit from unsecured financing of up to Rs. 10 million to cover their long-term investment expenses and short-term working capital needs. Governor Baqir also pointed out that a Sharia-compliant version of SAAF is also available.
The SBP allocated refinancing limits to eight winning banks for three years. Currently, these banks are finalizing their deployment plans for a successful implementation of the program. The selected banks are expected to roll out their SAAF programs shortly through public announcements and marketing campaigns so that SME borrowers can contact any of these eight banks to request unsecured financing.
To meet the financing needs of faith-sensitive borrowers, a Sharia-compliant alternative, ie âIslamic SME Asaan Financeâ (I-SAAF) has also been developed.
Copyright Business Recorder, 2021