SMEs play critical role in the economic development of a country by contributing in GDP growth, employment generation and export earnings. However, despite their immense economic significance, SMEs have faced impediments that have restricted their growth and resultantly limiting their due role in the national economy. Among various impediments, Access to Formal Finance has been the biggest problem being faced by SMEs.
2. Realizing the issue, SBP issued separate Prudential Regulations (PRs) for SMEs in 2003, vide BPD Circular No. 35 dated October 28, 2003, which provided significant impetus to the efforts being made for enhanced access to finance by SMEs. These regulations were amended from time to time. However, a review of Financing to SMEs over the years showed that banks/DFIs focus was mainly on Medium Enterprises; resulting in exclusion of Small Enterprises from the formal sources of credit. This is despite the fact that Small Enterprises constitute more than 90% of total SMEs in the country.
3. Accordingly, apart from other measures, SBP undertook a thorough review of existing Prudential Regulations for SMEs in consultation with relevant stakeholders. The broader objective of the Review was to create more focus on Small Enterprises, by defining them separately and formulating more specific and simpler regulations for them. The review, thus aimed at further improving the current Regulatory Environment in order to provide boost to the lending institutions to meet financing needs of SMEs. The revised SME PRs underscore importance of cash flow analysis and other proxies to assess primary source of repayment and also emphasize on greater use of technology and documentation for disciplined credit control for monitoring of credit quality. Since Medium Enterprises, as compared to Small Enterprises, are relatively less credit constrained in accessing loans on account of their size and sophistication level, the Regulations governing them have not been changed, with the exception of separate definition for Medium Enterprises, and revising their individual & aggregate borrowing limits upward.
4. After review, the SME Prudential Regulations have now the following structure:
- General Prudential Regulations that apply on both Small and Medium Enterprises
- Specific Prudential Regulations for Small Enterprise Financing
- Specific Prudential Regulations for Medium Enterprise Financing
5. Revised PRs are applicable with immediate effect for the fresh financing facilities. However, since the banks/DFIs need to segregate their existing SME portfolio according to the new definitions and revised classification criteria, Banks/DFIs are allowed a maximum implementationperiodupto September 30, 2013for the purpose of existing portfolio. The new set of Prudential Regulations for SMEs has been placed at SBP web-site http://www.sbp.org.pk which may be accessed / downloaded for consultation and ease of reference at any time.
6. These Prudential Regulations do not supersede directives and instructions issued by the State Bank of Pakistan in respect of areas not covered under above regulations, which also include the instructions on penalties.
7. Banks / DFIs are advised to ensure circulation of these regulations among all their offices / branches for meticulous compliance in letter and in spirit. Non-compliance of Prudential Regulations will lead to punitive action under the relevant provisions of Law. It may be noted that the transactions structured in a manner to circumvent these Prudential Regulations will tantamount to violations of Prudential Regulations and shall be dealt with accordingly.
8. Providing enabling Regulatory Framework is one important step only; nevertheless visible improvement in SME Financing shall only occur when banks/DFIs re-position themselves strategically in the market by appropriately aligning their business strategies with the needs of the sector. We expect that with the introduction of revised Prudential Regulations, the banks/DFIs will be able to adopt viable SME Banking approaches that will ultimately lead to better service and fulfillment of banking needs of SMEs.
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Encl: Revised Prudential Regulations for SMEs