Govt Approves Risk Coverage Scheme For SMEs

The federal government has approved a risk coverage scheme for SME financing based on instructions from the State Bank of Pakistan (SBP). Under the scheme, the government will cover up to 20 percent of credit losses on fresh SME loans, including working capital, running finance, and long-term loans. This will protect banks against credit losses on new SME loans. The program is aimed at doubling SME financing to Rs. 1.1 trillion within five years. Starting from July 1, 2024, the SBP will allocate risk coverage limits to financial institutions for new SME financing. Both new and existing SMEs, as defined by SBP Prudential Regulations, are eligible. All commercial and Islamic banks will participate as executing agencies. Meanwhile, loan amounts will be capped at Rs. 25 million for small enterprises and Rs. 200 million for medium enterprises, with loans covering various needs from working capital to long-term financing up to five years. The federal government will absorb 20 percent of credit losses on small enterprise loans and 10 percent on medium enterprise loans, covering only the principal portion. Defaulted loans will qualify for risk coverage claims. Banks will submit risk coverage claims electronically to the SBP’s Financial Inclusion Support Department (FISD) within 15 working days after each quarter. Despite this coverage, banks are still responsible for recovering defaulted amounts. Recovered funds from delinquent borrowers will be handled in three ways: