KARACHI: Outstanding loans from banks and development finance institutions (DFIs) to small businesses increased by 19.73% to reach 524.09 billion rupees in the last quarter of 2021, according to central bank data Friday.

These loans amounted to Rs 437.71 billion at the end of September. Financial institutions have provided financing of Rs 481.78 billion to Small and Medium Enterprises (SMEs) as of December 31, 2020.

SME financing accounted for 6.51% of total credit to the private sector. It stood at 6.04% at the end of September 2021. The increase in demand for SME loans was attributed to the post-pandemic economic recovery and various credit guarantee and long-term financing programs of the Bank of Pakistan to boost lending to small businesses. . Some banks have also started providing loans to customers under a recently introduced collateral-free loan scheme known as SME Aasan Finance (SAAF).

Small and medium enterprises took out loans of 351.61 billion rupees to meet their working capital needs in December 2021, up from 277.29 billion rupees at the end of September, according to SBP data. These enterprises have obtained loans of Rs. 130.45 from banks and DFIs to meet their financing needs for fixed investment. By the end of December, banks and DFIs had provided trade finance to SMEs worth 42.04 billion rupees, which was slightly higher than the 41.70 billion rupees extended through September.

Central bank data showed that financing for SMEs in the manufacturing sector increased from 156.25 billion rupees to 225.57 billion rupees. SME traders obtained loans of Rs181.12 billion, against Rs 167.66 billion of loans at the end of September.

Funding for small businesses engaged in the service sector amounted to Rs 117.41 billion. This compared to 113.80 billion rupees at the end of September 2021.

The number of SME borrowers reached 164,756 at the end of December last year, compared to 163,629 until the end of September. The ratio of non-performing loans in this sector fell to 15.85% from 19.10%.

The SME sector plays an important role in the Pakistani economy and contributes 40% of GDP and 25% of export earnings as estimated by the Small and Medium Enterprises Development Authority.

However, SMEs find it difficult to access formal bank finance for several reasons, including relatively higher loan losses, high cost bank finance models, low use of appropriate technology needed for SME finance and a lack of acceptable security.

SMEs therefore often turn to exorbitant informal credit and face obstacles to growth. The majority of SMEs in the informal sector that do not have collateral currently borrow in cash or in kind at rates of at least 25%.

Therefore, the SBP launched the SAAF program in August 2021, which the SBP believes would be a game-changer in improving access to finance for SMEs, as it addresses the long-standing challenge of lack of collateral faced by these businesses. .

Under this scheme, SMEs can avail unsecured financing of up to Rs 10 million at the preferential end-user rate of up to 9% per annum to meet their long-term capital expenditures and short-term working capital needs. The program also provides a reasonable allocation to banks to allow them to invest in their processes, systems, human resources and technology.