Union SME Financing – Is it Really a …. ?

SME Definition (SBP) Type of Business a) Fixed Assets Excluding Land & Building (Rs.M) b) Employment (NOs) c) Turnover/Sales (Rs. M) Manufacturing Trade Service SBP SME Prudential Regulations Firms fulfilling a) and c) categorised as SMEs Credit needs of up to a max of Rs. 75 m from a single FI and collectively may go up to Rs. 150 m Public limited companies excluded from the scope of definition

SME Contribution to Economic Development (%) *GDP and Exports of Pakistan based on estimates from various studies. No formal data available

Reasons for Low Contribution of SMEs to GDP Absence of financial management and lack of book keeping practices Absence of financial management and lack of book keeping practices Hesitant to share financial Information due to fear of the Tax Man Hesitant to share financial Information due to fear of the Tax Man One man show; no management structures One man show; no management structures Inability of the banking sector to support SMEs Inability of the banking sector to support SMEs Lack of regulatory infrastructure and support systems for equity financing Lack of regulatory infrastructure and support systems for equity financing

SME Financing Primarily through Equity & Informal Sector Over 90% equity financed Over 90% equity financed 78% of the SMEs do not access credit from any formal source 78% of the SMEs do not access credit from any formal source Out of the remaining 22%, less than half ever approached the formal lending sector Out of the remaining 22%, less than half ever approached the formal lending sector Success rate among those who approached the formal lending sector lies between 20% & 66% Success rate among those who approached the formal lending sector lies between 20% & 66% Borrowing from informal sector at exorbitant rates Borrowing from informal sector at exorbitant rates Source: SMEDA-ILO MSME Survey

Financial Institutions “Entry Barriers” Un-structured target market Un-structured target market SME’s perceived to be high risk SME’s perceived to be high risk FIs not geared to reach out to diverse SME sectors FIs not geared to reach out to diverse SME sectors Small ticket sizes Small ticket sizes Poor financial disclosure of SMEs Poor financial disclosure of SMEs FI’s lack capacity and know how to evaluate SME credits; They still deal with them on a relationship basis FI’s lack capacity and know how to evaluate SME credits; They still deal with them on a relationship basis

Moving Forward New Regulatory framework and SME Policy from GoP New Regulatory framework and SME Policy from GoP Credit Guarantee and Venture Capital Funds being proposed Credit Guarantee and Venture Capital Funds being proposed SME Ombudsman being put in place SME Ombudsman being put in place SMEDA playing the role of Catalyst SMEDA playing the role of Catalyst

Moving Forward Separate SME Prudential Regulations issued by SBP Separate SME Prudential Regulations issued by SBP Encouragement to lend on asset conversion cycle and future cash flow basis Encouragement to lend on asset conversion cycle and future cash flow basis Audited accounts requirements enhanced to Rs. 10 m in case of proprietorships and partnerships Audited accounts requirements enhanced to Rs. 10 m in case of proprietorships and partnerships Clean lending limits enhanced to Rs. 3 million; Rs. 2m funded and Rs. 1m non-funded Clean lending limits enhanced to Rs. 3 million; Rs. 2m 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 “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) Limited services to limited number of customers UNPROFITABLE 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?  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 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 Development  Systems 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 Experience SMEs generally receptive to commercially viable financial solutions SMEs generally receptive to commercially viable financial solutions SMEs Value service quality and timeliness in credit processing SMEs Value service quality and timeliness in credit processing Excellent payment history Excellent payment history

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