Collateral-free loan

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STATE Bank Governor Dr Reza Baqir has revealed that the central bank was ready to initiate a scheme for financing of up to Rs 10 million for the cottage industry without any collateral.

Speaking to representatives of Lahore Chamber of Commerce and Industry, he said the government would give guarantees to banks against losses and would invite expressions of interest from the banks for inclusion in the scheme.

Small and Medium Enterprises (SMEs) constitute the dominant part of the GDP and total employment in almost all countries of the world and some countries became economic giants by focusing on their development.

Mindful of the fact, the successive governments in Pakistan designed schemes aimed at enhancing SMEs’ access to credit as part of their plans to ensure rapid growth of the sector.

However, most of the schemes either fell short of expectations or did not make the desired impact due to lack of required interest and commitment.

It is also argued that the high rate of defaults also keeps the bankers from advancing credit to small and medium businesses as the non-performing loans (NPLs) of the SMEs sector have historically remained high.

In this backdrop, the SBP deserves credit for devising a scheme that has the potential to contribute meaningfully to the growth of the SMEs sector as the potential borrowers will not be required to pledge the asset with the lender(s) and instead guarantees would be offered by the government.

There are reports that the SMEs would be given loans on the basis of ‘cash flow’ statements, which means the facility would be available for existing enterprises for modernization and expansion of their business.

The scheme will have selective utility if it is restricted to existing SMEs and therefore, like India, collateral free loans should also be available for setting up of new businesses.

The low interest rate of 9% under the scheme would surely be attractive for entrepreneurs as they currently get loans at about 24% interest rate, which is prohibitive for the growth of SMEs.

The scheme must have necessary safeguards to prevent its misuse by all those who are always on the look out to have a free lunch.