Loan defaults in Pakistan’s small and medium enterprises (SMEs) sector continued to rise in the third quarter of fiscal year 2025, despite efforts by the State Bank and government to improve finance access. This trend signals growing financial challenges for the sector.
Data from the State Bank of Pakistan shows that between January and March 2025, the non-performing loan (NPL) ratio for SMEs increased to 15.39 percent from 14.16 percent in the previous quarter. This steady rise highlights difficulties in the sector, which is considered the backbone of Pakistan’s economy.
Banks hesitate to lend to SMEs mainly due to high credit risk and the more attractive returns from government securities. Currently, about 60 percent of bank assets are invested in government bonds, far exceeding the 20 percent limit recommended for developing economies.
To ease financing hurdles, the State Bank launched the ‘Challenge Fund for Technology Adoption and SME Banking Digitalization’ (CFS). This fund aims to support banks in developing technology-based solutions to enhance SME access to financial services.
Under this scheme, grants will match the financial needs of proposals, with each bank eligible for only one grant. Banks must cover 15 percent of the project cost, and projects must be completed within eight months to receive support.
By March 2025, total working capital loans to the SME sector stood at 311.33 billion rupees, down from 332.8 billion in December 2024. This decrease suggests a decline in short-term loans, while fixed investment in the sector reached 2.42 trillion rupees, indicating a slow pace of long-term investment growth.