Govt approves up to 20% risk coverage for SME loans

August 02, 2024 (MLN): The government has approved a risk coverage scheme for small and medium enterprises (SMEs), offering to absorb up to 20% of the losses incurred by banks in the event of a borrower's default.

The scheme is part of the government and the State Bank of Pakistan (SBP) efforts to double the size of SME financing to Rs1.1 trillion in next 5 years, said a circular issued by SBP on Thursday, 

"Considering the critical importance of SMEs in inclusive economic growth and employment creation, the government of Pakistan, on the recommendation of the SBP, has approved a risk coverage scheme for securing banks’ fresh exposure against SMEs," said the circular.

The central bank explained the scheme’s key features, stating that SBP will allocate risk coverage limits to each participating financial institution (PFI) against fresh SME finance.

These loans are available to SMEs (both new and established companies) who meet the SBP’s definition of SMEs and adhere to prudential regulations.

Small businesses can receive up to Rs25 million in financing from banks, while medium-sized businesses can receive up to Rs200m.

These include all types of loans, including working capital loans/running finance and long term loans, with a tenure of up to five years.

The government will will absorb credit loss (principal portion only) on the banks’ fresh exposure against SMEs.

This includes providing 20% first loss coverage for new exposure to SMEs and 10% first loss coverage for new exposure to medium-sized firms.

The loans classified as loss on the time based criteria as mentioned in SBP prudential regulations for SME finance for SEs and MEs will be considered as the defaulted portfolio for the purpose of payment of claims against the risk coverage.

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