Small and medium enterprises- no less than four million in number- are waiting for broad economic recovery to resume their operation in full swing.
In the last fiscal year, the SME sector grew 7.5 per cent but thousand of SMEs had to cut production, suspend business and sack employees as large-scale manufacturing (LSM) declined by 8.4 per cent, resulting in huge job orders. In addition, a 2 per cent plus inflation and almost equal bank interest rates couples with electricity and gas shortages hit them hard. Now as LSM has begun crawling up, inflation has decelerated and interest rates softened, business opportunities are opening up for SMEs. Some large-scale industries that have picked up pace, like automobiles, electronics, light engineering, edible oil, chemicals and paper board, outsource a lot of ancillary items from them. If they keep growing- and chances are that they will- it will lift sagging output of SMEs in manufacturing sector.
However, revival of textile industry that accounts for one third of LSM is still not insight and this may impact many of the SMEs’ productivity.
An executive member of the Union of small & medium enterprises (UNISAME) said, “Many of our colleagues who suspended work in the last fiscal year have reinstalled sacked employees and restarted production”.
“initially we have seen activity in downstream for automobiles, electronics and light engineering,” but “Banks have almost stopped lending to SMEs and that can block growth of this sector.” bankers say they have restarted making fresh loans to the private sector but they admit that lending to SMEs is still negligible. In October 2009, banks gave Rs72 billion fresh loan to private sector.
“The problem with SME sector is that its non-performing loan (NPLs) as percentage of net loans almost doubled in the last fiscal year which forced us to halt lending and see what went wrong and where. Some banks are still in that process while others are past this exercise and would soon restart lending to SMEs.
Representatives of SMEs say lack of access to bank credit is a perennial problem for almost all small business insisting that banks mostly lend to medium-sized enterprises that employ 50 or more people in their business and not to small business units.
The state bank of governor has launched a pilot programmed for training and development of SME portfolio of Rs383 “out of the total SME portfolio of Rs383 billion only Rs38.3 billion (or 10 percent) was being channeled to business entities having less than 20 employees.”
The causes of it probably be “unorganized way of doing business of small entities.” Most banks do not have tailor-made credit products for SMEs nor do they have the systems, tools and the expertise to examine SMEs credit proposal professionally and monitor their loan portfolios efficiently. These factors compel banks to regard SME loans as riskier and charge a higher interest, thus restricting SMEs’ outreach to bank credit.
The SBP has lately allowed commercial banks to lend up to Rs3 million to SMEs without collaterals and is encouraging hem to introduce cash-flow based methodology instead of relying on traditional collateral-based lending.
The SBP step towards giving training to credit officers based in SME clusters in Lahore, Peshawar, Quetta, Rawalpindi, Karachi, Sialkot, and Gujrawala. The central bank is also establishing a Credit Guarantee Fund for Small and Rural Enterprises with the help of DFID of the UK.
These measures along with better economic environment may help SMEs revive their business. But the government will have to offer sector –specific incentives for SMEs keeping in view the origins of growth in our domestic economy and the areas that may show increase in domestic consumption. SMEDA officials named various areas where immediate action plan need to be implemented.
These include fruits and vegetable processing/packaging ; edible oil extraction from local oilseeds; cotton ginning; yarn; grey cloth making, manufacturing of readymade garments and other articles of textiles excluding towels and bed wear for domestic consumption; sports goods particularly gloves making and jewelry and furniture manufacturing etc.
In service sector, businessmen point out that SMEs catering to or involved in construction, transport, storage and communication, wholesale and retail trade are well-positioned to grow during this fiscal year. But thy say that unlike the SMEs in manufacturing sector fins it even harder to seek financing facilities from banks.
One of the reason that restrict SMEs access to formal financing is that foreign banks are simply averse to lending this sector and Islamic banks are yet to find ways to enhance their exposure. Foreign banks have around 0.5 percent shared in SMEs financing and Islamic banks about five per cent.
Major economies including China and India are now focused on driving domestic demand amidst a slow reversal of global recessionary trend. Pakistan also needs to continue a minimum stimulus spending to revive its own domestic consumption.
Some concrete steps to revive the SME sector like, providing seed money for setting up workers’ training institution and allowing duty drawbacks on machinery can help.
Businessmen suggest that part of export development funds can also be diverted to the SMEs with backward and forward linkages with export-oriented industries. Also SMEs in SMEs cluster cities must get maximum electricity and gas- and if load shedding becomes inevitable it must done under a per-announced schedule so that SMEs could rescheduled their work hours.
In the last fiscal year, the SME sector grew 7.5 per cent but thousand of SMEs had to cut production, suspend business and sack employees as large-scale manufacturing (LSM) declined by 8.4 per cent, resulting in huge job orders. In addition, a 2 per cent plus inflation and almost equal bank interest rates couples with electricity and gas shortages hit them hard. Now as LSM has begun crawling up, inflation has decelerated and interest rates softened, business opportunities are opening up for SMEs. Some large-scale industries that have picked up pace, like automobiles, electronics, light engineering, edible oil, chemicals and paper board, outsource a lot of ancillary items from them. If they keep growing- and chances are that they will- it will lift sagging output of SMEs in manufacturing sector.
However, revival of textile industry that accounts for one third of LSM is still not insight and this may impact many of the SMEs’ productivity.
An executive member of the Union of small & medium enterprises (UNISAME) said, “Many of our colleagues who suspended work in the last fiscal year have reinstalled sacked employees and restarted production”.
“initially we have seen activity in downstream for automobiles, electronics and light engineering,” but “Banks have almost stopped lending to SMEs and that can block growth of this sector.” bankers say they have restarted making fresh loans to the private sector but they admit that lending to SMEs is still negligible. In October 2009, banks gave Rs72 billion fresh loan to private sector.
“The problem with SME sector is that its non-performing loan (NPLs) as percentage of net loans almost doubled in the last fiscal year which forced us to halt lending and see what went wrong and where. Some banks are still in that process while others are past this exercise and would soon restart lending to SMEs.
Representatives of SMEs say lack of access to bank credit is a perennial problem for almost all small business insisting that banks mostly lend to medium-sized enterprises that employ 50 or more people in their business and not to small business units.
The state bank of governor has launched a pilot programmed for training and development of SME portfolio of Rs383 “out of the total SME portfolio of Rs383 billion only Rs38.3 billion (or 10 percent) was being channeled to business entities having less than 20 employees.”
The causes of it probably be “unorganized way of doing business of small entities.” Most banks do not have tailor-made credit products for SMEs nor do they have the systems, tools and the expertise to examine SMEs credit proposal professionally and monitor their loan portfolios efficiently. These factors compel banks to regard SME loans as riskier and charge a higher interest, thus restricting SMEs’ outreach to bank credit.
The SBP has lately allowed commercial banks to lend up to Rs3 million to SMEs without collaterals and is encouraging hem to introduce cash-flow based methodology instead of relying on traditional collateral-based lending.
The SBP step towards giving training to credit officers based in SME clusters in Lahore, Peshawar, Quetta, Rawalpindi, Karachi, Sialkot, and Gujrawala. The central bank is also establishing a Credit Guarantee Fund for Small and Rural Enterprises with the help of DFID of the UK.
These measures along with better economic environment may help SMEs revive their business. But the government will have to offer sector –specific incentives for SMEs keeping in view the origins of growth in our domestic economy and the areas that may show increase in domestic consumption. SMEDA officials named various areas where immediate action plan need to be implemented.
These include fruits and vegetable processing/packaging ; edible oil extraction from local oilseeds; cotton ginning; yarn; grey cloth making, manufacturing of readymade garments and other articles of textiles excluding towels and bed wear for domestic consumption; sports goods particularly gloves making and jewelry and furniture manufacturing etc.
In service sector, businessmen point out that SMEs catering to or involved in construction, transport, storage and communication, wholesale and retail trade are well-positioned to grow during this fiscal year. But thy say that unlike the SMEs in manufacturing sector fins it even harder to seek financing facilities from banks.
One of the reason that restrict SMEs access to formal financing is that foreign banks are simply averse to lending this sector and Islamic banks are yet to find ways to enhance their exposure. Foreign banks have around 0.5 percent shared in SMEs financing and Islamic banks about five per cent.
Major economies including China and India are now focused on driving domestic demand amidst a slow reversal of global recessionary trend. Pakistan also needs to continue a minimum stimulus spending to revive its own domestic consumption.
Some concrete steps to revive the SME sector like, providing seed money for setting up workers’ training institution and allowing duty drawbacks on machinery can help.
Businessmen suggest that part of export development funds can also be diverted to the SMEs with backward and forward linkages with export-oriented industries. Also SMEs in SMEs cluster cities must get maximum electricity and gas- and if load shedding becomes inevitable it must done under a per-announced schedule so that SMEs could rescheduled their work hours.
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