Prudential Regulations for Small and Medium Enterprises Financing

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Muhammad Kamran Shehzad Syed Irfan Ali Inayat Hussain Mohsin Rasheed Allauddin Achakzai

Executive Director Director (BP & RD) Director (BID) Joint Director Jr. Joint Director

(92-21) 9212512 (92-21) 9213580 (92-21) 9211059 (92-21) 9212434 (92-21) 2453519

Website Address:

PART-A PART-B Regulation R-1

Definitions. Regulations. Sources and capacity of repayment and cash flow backed lending. Personal guarantees. Limit on clean facilities. Securities. Margin requirements. Per party exposure limit. Aggregate exposure of a bank / DFI on SME sector. Minimum conditions for taking exposure. Proper utilization of loan. Restriction on facilities to related parties. Classification and provisioning for assets. -

9 15 15 15 15 16 16 16 17 17 18 18 18 23-33

Regulation R-2 Regulation R-3 Regulation R-4 Regulation R-5 Regulation R-6 Regulation R-7

Regulation R-8 Regulation R-9 Regulation R-10 Regulation R-11 Annexures

PREFACE Keeping in view the important role of Small and Medium Enterprises (SMEs) in the economic development of Pakistan and to facilitate and encourage the flow of bank credit to this sector, a separate set of Prudential Regulations specifically for SME sector has been issued by State Bank of Pakistan. This separate set of regulations, specifically tailored for SMEs, is aimed at encouraging banks / DFIs to develop new financing techniques and innovative products which can meet the financial requirements of SMEs and provide a viable and growing lending outlet for banks / DFIs. Banks / DFIs should recognize that success in SME lending requires much more extensive involvement with the SMEs than the traditional lender-borrower relationship envisages. The banks / DFIs are, thus, encouraged to work in close association with SMEs. The banks / DFIs should assist and guide the SMEs to develop appropriate systems and effectively manage their resources and risks. The banks / DFIs are encouraged to prepare a lending program (including detailed eligibility criteria) for each specific sub-sector of SME in which they want to take exposure in a significant manner. For this purpose, the banks / DFIs may conduct / arrange surveys and research to determine the status and potential of specific SME sub-sectors. It is expected that banks / DFIs would prepare comprehensive guidelines / manuals and put in place suitable mechanism / structure, aided by proper MIS, to carry out the activities related to SME financing in an effective way. This should, however, not stop banks / DFIs from lending to SMEs before undertaking the steps mentioned above as the banks / DFIs may start soft lending operations or test marketing campaigns, as they feel appropriate, to gain experience and necessary know how. The factors mentioned above gain more importance and become critical for the success of a bank / DFI in SME lending, as the exposure of the bank / DFI on SMEs becomes a significant portion of its loan portfolio. State Bank of Pakistan encourages banks / DFIs to lend to SMEs on the basis of assets conversion cycle and future cash flows. A problem, which the banks / DFIs may encounter in this respect, is the lack of adequate information. In order to overcome this problem, banks / DFIs may also like to prepare general industry cash flows and then adjust those cash flows for the specific borrowers keeping in view their conditions and other factors involved. As mentioned above, presently most of the SMEs in Pakistan lack sophistication to have reliable and sufficient data and financial information. In order to capture this data and information, banks / DFIs will need to assist and...
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