SME sector in Pakistan comprises about 90% of all private sector enterprises, and about 78% of non-agriculture labour force. SME sector is contributing over 30% to the GDP, also one-fourth of the Export earnings are being provided.
According to the SBP’s latest report pertaining to SME sector, Total outstanding loans to SME sector are eased by 4.1% on year-to-year basis and to Rs 334 billion is only 9.6% of the total outstanding loans of banking industry. The quality of loans measured in terms of non-performing loans ratio is not healthy.
The report also shows that NPLs for the year 2010 has risen to the level of rupees 96.5 billion in December, 2010 as compared to rupees 92 billion in December, 2009. The NPL ratio has reached to 29% from 9.5% of 2007.
The report also depicts that Trading and Services SME borrowers, who comprise about 82% of Total SME borrowings is increased by 3.8% and 0.2% respectively. On the other hand Manufacturing SMEs are declined by 11.7 % on year-on-year basis. According to the report 90% of the borrowers use these loans for working capital purposes; only 5.3% use these for making fixed capital expenditures. This trend of rising NPL s can rightly be attributed to high interest rates, deteriorating law and order condition in the country and also to the bank’s reluctance in extending credit to this much risky sector.
These SME lending can be increased to the desired level by offering incentives on Revival of SMEs and agriculture activities. The modernization of SME thru refinancing can also result in promotion of and development of SME sector. The Government of Pakistan can also play an effective role in promoting SME sector by developing infrastructure, laws and by-laws, policies.