SMESME@@UnionUnion

SME Financing – Is it Really aSME Financing – Is it Really a….….??

SME Definition (SBP) SME Definition (SBP)

Type of Type of BusinessBusiness

a) Fixed Assets a) Fixed Assets Excluding Land Excluding Land

& Building & Building (Rs.M)(Rs.M)

b) Employment b) Employment (NOs)(NOs)

c) Turnover/Sales c) Turnover/Sales (Rs. M)(Rs. M)

ManufacturingManufacturing 100100 250250 300300

TradeTrade 5050 5050 300300

ServiceService 5050 250250 300300

SBP SME Prudential RegulationsFirms fulfilling a) and c) categorised as SMEsCredit needs of up to a max of Rs. 75 m from a single FI and collectively may go up to Rs. 150 mPublic limited companies excluded from the scope of definition

SME Contribution to Economic SME Contribution to Economic Development (%)Development (%)

Korea Japan China Pakistan

Establishments 99.16 99.00 99.40 99.00

GDP 46.00 51.00 50.00 20-25*

Employment 75.25 80.00 73.00 78.00

Exports 39.60 38.00 60.00 25.00*

*GDP and Exports of Pakistan based on estimates from various studies. No formal data available

Reasons for Low Contribution of Reasons for Low Contribution of SMEs to GDPSMEs to GDP

Absence of financial management and lack of book keeping Absence of financial management and lack of book keeping

practicespractices

Hesitant to share financial Information due to fear of the Tax Hesitant to share financial Information due to fear of the Tax

ManMan

One man show; no management structuresOne man show; no management structures

Inability of the banking sector to support SMEsInability of the banking sector to support SMEs

Lack of regulatory infrastructure and support systems for Lack of regulatory infrastructure and support systems for

equity financingequity financing

SME Financing Primarily through Equity & SME Financing Primarily through Equity & Informal SectorInformal Sector

Over 90% equity financedOver 90% equity financed

78% of the SMEs do not access credit from any formal 78% of the SMEs do not access credit from any formal

sourcesource

Out of the remaining 22%, less than half ever Out of the remaining 22%, less than half ever

approached the formal lending sectorapproached the formal lending sector

Success rate among those who approached the formal Success rate among those who approached the formal

lending sector lies between 20% & 66%lending sector lies between 20% & 66%

Borrowing from informal sector at exorbitant ratesBorrowing from informal sector at exorbitant rates

Source: SMEDA-ILO MSME Survey

Financial InstitutionsFinancial Institutions“Entry Barriers”“Entry Barriers”

Un-structured target marketUn-structured target market

SME’s perceived to be high riskSME’s perceived to be high risk

FIs not geared to reach out to diverse SME sectorsFIs not geared to reach out to diverse SME sectors

Small ticket sizesSmall ticket sizes

Poor financial disclosure of SMEsPoor financial disclosure of SMEs

FI’s lack capacity and know how to evaluate SME FI’s lack capacity and know how to evaluate SME

credits; They still deal with them on a relationship credits; They still deal with them on a relationship

basisbasis

Moving ForwardMoving Forward

New Regulatory framework and SME Policy from New Regulatory framework and SME Policy from

GoPGoP

Credit Guarantee and Venture Capital Funds being Credit Guarantee and Venture Capital Funds being

proposedproposed

SME Ombudsman being put in placeSME Ombudsman being put in place

SMEDA playing the role of CatalystSMEDA playing the role of Catalyst

Moving ForwardMoving Forward Separate SME Prudential Regulations issued by SBPSeparate SME Prudential Regulations issued by SBP

Encouragement to lend on asset conversion cycle Encouragement to lend on asset conversion cycle

and future cash flow basisand future cash flow basis

Audited accounts requirements enhanced to Rs. 10 Audited accounts requirements enhanced to Rs. 10

m in case of proprietorships and partnershipsm in case of proprietorships and partnerships

Clean lending limits enhanced to Rs. 3 million; Rs. Clean lending limits enhanced to Rs. 3 million; Rs.

2m funded and Rs. 1m non-funded2m funded and Rs. 1m non-funded

SBP has set the stage for a conducive regulatory environment by moving away from micro management.

FIs have to respond

SBP has set the stage for a conducive regulatory environment by moving away from micro management.

FIs have to respond

Bridging the Gap Bridging the Gap

“Window of Opportunity”“Window of Opportunity”

Union Bank SME Strategy

Lower unit costs per

transaction or service

Broader service offerings & higher asset quality

Productivity Frontier(Future state of Best Practice)

Limitedservices tolimited numberof customersUNPROFITABLE

How?

Generating Growth:

Through need analysis & Customised product

development

Improving Asset Quality:

Through enhanced risk management;

determination of sectoral risks

Increasing Operating

Efficiency:

Streamlined processes for credit approval and

management

Why are We Different?Why are We Different?

Two Pronged Strategy for SME Market:

Relationship Management

Programmed Products

Dedicated R & D wing

Customised Product Programmes

Financial Product Branding

Dedicated Sales Teams

Exclusive SME Branches

Programmed Product DevelopmentProgrammed Product Development

Identification of Potential Sectors

Sector Intelligence (Primary and Secondary Research)

Quantitative

Qualitative

Product Profiling

Nature of the Product (financial solution)

Product Viability

Product Marketing

Product Sales

Programmed Product DevelopmentProgrammed Product DevelopmentSystems and Controls

Eligibility Criteria (documentation customised according to

sector norms

Compliance with SBP Prudential Reg

Loan Approval Process Flows

Internal Verifications

External Verifications (Income, collateral, legal)

Credit decisions

Turn Around Times

Monitoring and Feedback after Line Activation

Collections

Our ExperienceOur Experience

SMEs generally receptive to commercially SMEs generally receptive to commercially

viable financial solutionsviable financial solutions

SMEs Value service quality and timeliness in SMEs Value service quality and timeliness in

credit processingcredit processing

Excellent payment historyExcellent payment history

Thank You !!!Thank You !!!