Karachi, August 1, 2024 – The State Bank of Pakistan (SBP) on Thursday launched a groundbreaking risk coverage scheme aimed at enhancing the financing landscape for Small and Medium Enterprises (SMEs).
This initiative underscores the critical role of SMEs in driving inclusive economic growth and employment creation in Pakistan.
The Government of Pakistan, upon the recommendation of the SBP, has approved the Risk Coverage Scheme to secure banks’ fresh exposures against SMEs. This strategic move is part of the combined efforts of the Government and the SBP to double SME financing to Rs. 1,100 billion within the next five years.
Key Features of the Risk Coverage Scheme:
1. Proposed Outlay: The scheme covers fresh or incremental financing starting from July 1, 2024.
2. Credit Guarantee Limits: The SBP will allocate risk coverage limits to each participating financial institution (PFI) against fresh SME finance.
3. Eligibility Criteria: The scheme targets SMEs, including new and existing businesses, as defined by SBP’s SME Finance Prudential Regulations.
4. Loan Size: Loans up to Rs. 25 million for Small Enterprises (SEs) and up to Rs. 200 million for Medium Enterprises (MEs), in line with SBP Prudential Regulations.
5. Loan Types: The scheme includes all types of loans, such as working capital loans/running finance and long-term loans.
6. Loan Tenor: Loans can be availed for a duration of up to 5 years.
7. Security Requirements: As per SBP’s Prudential Regulations for SME Finance.
8. Risk Mitigation: The government will absorb credit loss (principal portion only) on the banks’ fresh exposures against SMEs, offering 20% first loss coverage for SEs and 10% for MEs.
9. Loan Loss Criteria: Loans classified as loss based on time-based criteria in SBP Prudential Regulations will be considered defaulted for claim purposes.
10. Executing Agency: All commercial and Islamic banks are eligible to participate.
11. Submission of Claims: Banks will lodge risk coverage claims electronically with the Financial Inclusion Support Department (FISD), SBP BSC, within 15 working days after the completion of each quarter.
12. Recoveries Against Classified/Loss Loans: Payment of claims will not negate banks’ recovery rights. Banks will continue their regular recovery procedures, and recovered amounts will be adjusted or deposited as per the scheme’s guidelines.
Impact on SME Sector:
This initiative is expected to significantly reduce the risk for banks, encouraging them to extend more credit to SMEs. By securing a portion of the loan principal, the scheme aims to mitigate the financial risks associated with SME lending, thus fostering a more supportive environment for small and medium businesses to thrive.
SBP Governor Jameel Ahmad emphasized the importance of this scheme, stating, “The Risk Coverage Scheme is a pivotal step towards strengthening our SME sector. By mitigating the risks for banks, we are paving the way for increased financial access for SMEs, which are the backbone of our economy.”
Looking Ahead:
The launch of this scheme marks a significant milestone in Pakistan’s financial sector. The SBP and the Government of Pakistan are committed to continuously enhancing the business environment for SMEs, aiming for sustainable economic growth and broader financial inclusion.
As this scheme rolls out, SMEs across the country are expected to benefit from enhanced credit availability, leading to greater innovation, job creation, and overall economic prosperity. The SBP will monitor the scheme’s implementation closely to ensure it meets its objectives and makes a meaningful impact on the SME sector.