BANKS NEED TO BE EDUCATED IN RISK MANAGEMENT

Bank advances to SMEs up slightly…..THE NEWS INT’L
Erum Zaidi
Thursday, February 27, 2014

KARACHI: Bank advances to the small and medium enterprises (SMEs) rose slightly by 2.46 percent during the last quarter of 2013, according to latest figures from the State Bank of Pakistan (SBP).
As compared to loans worth Rs 3 trillion given to large corporations, commercial banks’ loans to SMEs went up on a lesser scale. During October to December 2013, they were Rs284 billion as compared to Rs277 billion in the same quarter of 2012.

Analysts say growth in the SMEs sector has remained sluggish for the last six to seven years due to adverse economic conditions, energy shortages and rising non-performing loans.

The SBP’s figures show that the amount of non-performing loans (NPLs) pending against SMEs decreased to Rs92 billion by the end of December 2013. That’s down from Rs96 billion during the corresponding quarter of previous year, showing 32.3 percent decline in the loan infection ratio.

Most analysts say the banks took a more risk-averse posture and diverted significant funds to less risky asset classes from the government, such as market treasury bills and commodities. This further squeezed the available funds and aggravated the prevalent conditions for the SMEs.

President Union of Small and Medium Enterprises (UNISAME) Zulfikar Thaver says the regulator needs to ensure that commercial banks finance the SMEs to get timely finance for imports and exports. It’s also to meet their contractual obligations on time by obtaining bridge financing from banks.

He pointed out that the commercial banks are parking their funds with government and lending to the large corporations only.

They provide the large enterprises pre-shipment finance but decline even post shipment finance to the SMEs.

“The banks are demanding 100 percent margin to open letter of credits for imports of machinery, raw material and commodities and on the other hand are not discounting export letter of credits for shipments made to third world countries and banks of low rating despite good track records and good credit reports from overseas buyers,” Thaver said.
If the commercial banks are given guarantees by the SBP for financing export bills the exports will increase tremendously.

India is an example where there is state guarantee for exports to third world countries. Such labeled third world countries are now doing well and have improved their economy over the last 10 years.
Thaver said the system of collateral management whereby the prospective borrower pledges the goods in the warehouse and obtains finance against the mortgage of goods is not widely practiced in Pakistan. Commercial banks are simply demanding mortgage of immovable property.

The SBP needs to make sure such institutions are comfortable in financing SMEs and develop a workable guarantee insurance to indemnify the banks against default by the SME borrower.

No doubt the SBP has many schemes for the SMEs but since the risk involved is of the disbursing banks they are not prepared to take even calculated risk. Therefore the SBP’s efforts to uplift the sector is defeated so it is imperative for central bank to ensure that the risk element is covered and the banks are made comfortable.

The banks need to learn risk management and finance SMEs on the basis of positive cash flows and goods in transit. The banks also need to finance SMEs for purchase of income generation for vehicles, shops, offices, workshops, factories against installments under pay as you earn scheme.
Thaver said without the SBP’s firm direction the banks will not be inclined to finance the SMEs as they are not inclined to take the risk. That’s despite the fact that SME financing is safe if done under proper risk management by collateral management.

He said that the government mentioned in the last trade policy that it would open an export and import (EXIM) bank to boost the SMEs sector. However, no development has been taken place on this front.
There is a fully fledged SMEs bank here, but it has shortage of funds and is working on the lines of the commercial banks.

Posted in: Press Releases