Nature and Characteristics of SME Financing and NPLs in Pakistan

The study explores trends in SME financing over the past decade, and reasons that have contributed to high ratio of NPLs. Pakistan’s small and medium enterprises (SMEs) suffer from low access to credit against a sobering trend of low overall private sector credit. At PKR 405 billion, SME financing in Dec-16 was 6.7 percent of overall private sector credit. At its peak in Dec-07, the proportion of SME credit to overall credit was 15 percent (PKR 437 billion), lower than, but still comparable with other emerging and regional economies averaging 18 percent.

During the 2008 balance of payment crisis in Pakistan, lending to the private sector declined. The decline in funding to SMEs was even steeper, falling from 11 to 9.8 percent of total private sector funding. High inflation and interest rates, coupled with sharp currency depreciation and intense energy shortages contributed to high toxicity in assets. Non-performing loans (NPLs) against private sector lending surged from 7.6 percent in CY07 compared to 15.8 percent in CY11. Significantly higher NPLs were reported for the SME sector—9 to 32 percent between CY07-11. The infection ratio for the SME portfolio continued to mount, reaching 35 percent in CY12. Since then, NPLs for the SME segment have declined, but slowly, remaining north of 20 percent as of Dec-16

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