Please refer to IH&SMEFD Circular No. 08 dated May 07, 2013 on the above subject.
2. With a view to further facilitate promotion of SME financing by providing enabling regulatory environment, Prudential Regulations (PRs) for SME Financing have been revised in consultation with the stakeholders. Accordingly, in line with market changes, certain amendments have been made in the Regulations, a summary of which is as follows:
i. Regulation SME R-3, Personal Guarantee: In case of limited companies, guarantees of only sponsor directors shall be obtained.
.ii. Regulation SME R-6, Restriction on Facilities to Related Parties: For the purpose of this PR, the words “dependent family member” have been replaced with “family member” to bring it in conformity with BCO, 1962.
iii. Regulation SE R-1, Definition of Small Enterprise (SE): For SEs, Annual Sales Turnover upper limit has been increased from Rs 75 million to Rs 150 million and upper limit regarding number of employees has also been enhanced from 20 employees to 50 employees.
Further, an entity has to fulfill both the criteria of number of employees and sales turnover for categorization as small enterprise. However, in cases where an entity fulfils one parameter of SE and its second parameter falls within the range prescribed for medium enterprise (ME) or above the upper limit prescribed for ME, the subject entity shall be classified as ME or commercial/corporate entity as the case may be.
iv. Regulation SE R-2, Per Party Exposure Limit: For small enterprises, maximum per party exposure limit has been increased from Rs 15 million to Rs 25 million. Besides, the banks/DFIs are now also allowed to deduct the liquid assets held under their perfected lien for the purpose of calculation of per party exposure limit.
v. Regulation SE R-3, Requirement of Audited Accounts: Banks/DFIs shall obtain a copy of audited financials from small enterprises for exposure above Rs 15 million.
vi. Regulation SE R-7, General Reserve against Small Enterprise Finance: General Reserve requirement against non-fund based SE portfolio has been abolished. Furthermore, for calculation of General Reserve, netting of liquid securities has also been allowed.
vii. Regulation SE R-9, Restructuring/Rescheduling of Loans (Sub Para i of Para 1): For immediate declassification of loans to small enterprises, the condition of 50% payment in cash of restructured loan amount has been replaced with 35% cash payment.
viii. Regulation ME-1, Definition of Medium Enterprise (ME): For MEs, parameters of annual sales turnover and number of employees have been revised upward. Accordingly, a medium enterprise (ME) is a business entity, ideally not a public limited company, which meets the following parameters:
| *Number of Employees
|| Annual Sales Turn-Over
| 51-250 (Manufacturing & Service MEs)
51-100 (Trading MEs)
|Above Rs 150 million and up to Rs 800 million
(All types of Medium Enterprises)
*including contract employee
Further, an entity has to fulfill both the criteria of number of employees and sales turnover for categorization as medium enterprise. However, when an entity’s one parameter is as per ME criteria and its second parameter is as per SE criteria, than subject entity would be categorized as ME. Similarly, where an entity’s one parameter is as per ME and its second parameter is above the upper limit prescribed for ME, the subject entity shall be categorized as commercial/corporate entity.
ix. Regulation ME R-3, Per Party Exposure Limit: Medium Enterprises can now avail financing (including leased assets) upto Rs 200 million from a single bank/DFI or from all banks/DFIs. Besides, the banks/DFIs are now also allowed to deduct the liquid assets held under their perfected lien for the purpose of calculation of per party exposure limit.
x. Regulation ME R-5, Classification and Provisioning for Assets (Para 3): For immediate declassification of loans to medium enterprises, the condition of 50% payment in cash of restructured loan amount has been replaced with 35% cash payment.
3. These changes are applicable with immediate effect. However, since the banks/DFIs need to segregate their existing portfolio according to the revised definition of Small Enterprise and Medium Enterprise, banks/DFIs are allowed an implementation period upto September 30, 2016 for the purpose of existing portfolio. Updated set of Prudential Regulations for SME Financing incorporating changes as summarized under Para 2 above has been placed at SBP website http://www.sbp.org.pk/publications/prudential/index.htm..
4. Banks/DFIs are advised to ensure circulation of these regulations among all their offices/ branches for meticulous compliance in letter and 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.
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