SME bank’s closure to curb new loans to small borrowers

Erum Zaidi
Saturday, Mar 18, 2023

KARACHI: The government has given a go-ahead for the closure of SME Bank Limited, a lender focused on small and medium-sized businesses, after attempts to raise capital failed.

The banking and SME industries do not support this decision because this specialised institution supports small firms by giving them financial assistance and business support services in the form of short- to long-term funds.

The decision was anticipated, though. SME Bank was removed from the government’s list of potential privatisations since no bank was willing to buy it because of its dire financial situation. The SME Bank was losing over Rs1 billion annually, and the government felt that keeping the bank on life support was not a wise course of action.

The State Bank of Pakistan (SBP) asked the government to swiftly set aside the funds required to cover the bank’s immediate liquidity needs in order to prevent defaults on payments to its depositors.

SBP also recommended that the winding-down process be started as soon as possible to prevent additional loss accumulation and potential strain on the exchequer.

According to a statement released by the Prime Minister’s Office, the federal cabinet has now approved the winding down of the SME Bank on the recommendation of the SBP, while giving instructions to safeguard the preservation of depositors’ funds.

The federal cabinet meeting was presided over by Prime Minister Shehbaz Sharif, who gave the directive that the client deposits should be protected throughout the winding down process. It was agreed that the first phase would involve paying Rs5.557 billion to all the customers of the bank.

According to the Deposit Protection Corporation, deposits in Pakistani banks are guaranteed up to Rs250,000 per depositor.

The International Monetary Fund (IMF) advises recapitalising financially troubled banks or facing liquidation.

The government promised the IMF last year that two banks would be put into “resolution” by May 2023 if the first phase of their recapitalisation plan wasn’t completed by March of that year. Although the two organisations’ names were omitted, it is clear that Silkbank and Summit Bank are the subjects of the conversation.

In a memorandum of economic and financial policies attached to the IMF’s country report on Pakistan published in August 2022, the government said overall, banks remain well capitalised and profitable, with non-provisioned NPLs (non-performing loans) at 0.7 percent as of end-March 2022. However, there are pockets of vulnerability with three small banks remaining undercapitalised.

The government accepted that the progress on the public sector bank undergoing privatisation remains slow and “we were unable to complete the process by end-January 2022”. As previously committed, the Privatization Commission Board has recommended the Cabinet Committee on Privatization to delist the bank from the privatisation programme. SBP had formally informed the government that the bank cannot be rehabilitated and should be resolved. The bank was established in 2001. Since 2007, the bank was operating with a paid-up capital of Rs2.39 billion. According to the SME Bank annual report for 2021, banks must raise paid-up capital to meet minimum capital requirements of Rs10 billion in accordance with the SBP standards. According to the report, the bank had requested an exemption from the SBP’s requirement for a minimum paid-up capital of Rs10 billion.

­The bank reported loss before tax of Rs1.051 billion in 2021, compared with Rs1.147 billion in 2020. The deposits of the bank stood at Rs8.248 billion as on December 31, 2021, compared with Rs7.602 billion last year.

The bank might be turned around, according to a senior banker. Even though the institution is controlled by the government, the management should be competent. The government does not control businesses. State-owned businesses exist in Korea, China, and India and are quite successful, he said.

The government might have handed a professional management control of the SME Bank and asked them to come up with a five-year strategy to bring it around.

The bank’s closure by the government took a long time, but by not shutting it down five years ago, a lot of harm has been done, the banker added.

The weaker banks have previously merged with larger banks. It was also debated whether the SME Bank and the National Bank of Pakistan might merge.

Zulfikar Thaver, President of the Union of Small and Medium Enterprises said SME Bank should not be merged with the NBP as it would lose its identity and no more remain SME Bank.

“It should be injected with funds and also the government must return all its assets (that were) taken away; its land, its capital – and allowed to function. It should also be allowed to raise its own capital by offering shares to the public,” Thaver said. “It is very unfortunate that their indecisiveness has caused considerable loss to the sector which deserves a specific bank to cater to its requirements.”