how to obtain finance from sme bank

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SMEDA Business Guide Series

H OW TO OBTAIN FINANCEFROM SME BANK

Revised on N ovember 10, 2005

Prepared By: Policy & Planning

Small and Medium Enterprise DevelopmentAuthority

Ministry of Industries, Production & Special InitiativesGovernment of Pakistan

www.smeda.org.pk

H EAD OFFICELAHORE

6th Floor, L.D.A Plaza,Egerton RoadLahore-54792

Tel: 111-111-456Fax: (042) 6304926

[email protected]

REGIONAL OFFICESINDH

5th Floor, Bahria Complex 2,M.T.Khan Road,

KarachiTel: (021) 111-111-456

Fax: (021) [email protected]

REGIONAL OFFICENWFP

Ground floorState Life BuildingThe Mall, Peshawar

Tel: (091) 9213046-47Fax: (091) 286908

[email protected]

REGIONAL OFFICEBALOCH ISTAN

Bungalow No. 15-AChaman Housing Scheme

Airport Road, Quetta.Tel: (081) 2831702/ 2831623

Fax: (081) [email protected]


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TABLE OF CONTENTS

1. Introduction to SMEDA 03

2. Role of Policy & Planning 03

3. What is SME? 04

4. Problem Faced by SMEs 04

5. SME Banks Approach to Financing 05

6. Project Lending Scheme 05

7. Program Lending Schemes 05

8. How to Apply for a Loan to SME Bank? 06

9. General Lending Criteria 06

10.Loan Process 09

11.Some Tips for Getting Finance 10

12.Process Flow Chart 11

13.Branch Network 12

14.Annex I 16-19

15.Annex II 20-23


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Obtain Finance from SME Bank Policy & Plannin

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INTRODUCTION OF SMEDA

The Small and Medium Enterprise Development Authority (SMEDA) was established with thobjective to provide fresh impetus to the economy through the launch of an aggressive SMEdevelopment strategy.

Since its inception in October 1998, SMEDA had adopted a sectoral SME development approach. Afew priority sectors were selected on the criterion of SME presence. In depth research was conducteand comprehensive development plans were formulated after identification of impediments anretardants. The all-encompassing sectoral development strategy involved overhauling of thregulatory environment by taking into consideration other important aspects including financemarketing, technology and human resource development.

After successfully qualifying in the first phase of sector development SMEDA reorganised itoperations in January 2001 with the task of SME development at a broader scale and enhancedoutreachreach in terms of SMEDAs areas of operation. Currently, SMEDA along with sectoral focuoffers a range of services to SMEs including over the counter support systems, exclusive busines

development facilities, training and development and information dissemination through a wide rangof publications. SMEDAs activities can now be classified into the three following broad areas:

1. Creating a Conducive Environment; includes collaboration with policy makers to devisfacilitating mechanisms for SMEs by removing regulatory impediments across numerous policareas

2. Cluster/Sector Development; comprises formulation and implementation of projects for SMEclusters/sectors in collaboration with industry/trade associations and chambers

3. Enhancing Access to Business Development Services; development and provision of services tmeet the business management, strategic and operational requirements of SMEs

SMEDA has so far successfully formulated strategies for sectors, including fruits and vegetables

marble and granite, gems and jewellery, marine fisheries, leather and footwear, textiles, surgicainstruments, transport and dairy. Whereas the task of SME development at a broader scale stirequires more coverage and enhanced reach in terms of SMEDAs areas of operation.

Along with the sectoral focus a broad spectrum of services are now being offered to the SMEs bSMEDA, which are driven by factors like enhanced interaction amongst the stakeholders, need basesectoral research, over the counter support systems, exclusive business development facilitiestraining and development for SMEs and information dissemination through wide range opublications.

ROLE OF POLICY & PLANNING DEPARTMENT

The Policy & Planning department of SMEDA is the hub of policy and regulatory research that feednational, provincial and local government institutions, SME associations, industrial clusters anindividual entrepreneurs with the ultimate objective of creating a conducive business environment. Ihas a mandate to identify and where suitable initiate strategic projects. The Policy & Planning oSMEDA plays a key role in providing an overall policy direction to SMEDA, under which SMEDAprovides support to SMEs. The P&P provides guidance based on field realities pertaining to SMEs iPakistan and other parts of the world. Information resource center of SMEDA is an integral part o


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Policy & Planning department while development of Regulatory Procedures is a part of an overalinformation dissemination function of the department.

In order to facilitate SMEs at the micro level Policy & Planning department has developed userfriendly systems which provide them detail description of the Laws and Regulations including thprocess and steps required for compliance.

What is SME?

As defined by State Bank of Pakistan - SME (Small and Medium Enterprise) means an entity, ideallynot a public limited company, which does not employee more than 250 persons (if it is manufacturingconcern) and 50 persons (if it is trading / service concern) and also fulfills the following criteria ofeither a and c or b and c as relevant:(a) A trading / service concern with total assets at cost excluding land and buildings up to Rs 50million.(b) A manufacturing concern with total assets at cost excluding land and building up to Rs 100million.

(c) Any concern (trading, service or manufacturing) with net sales not exceeding Rs 300 million as perlatest financial statements.

In order to obtain financing from SME Bank, the enterprise must fall within the bracket of definitioof small and medium enterprise given by SME Bank.

Problems Faced By SMEs

The SME sector in Pakistan has always been taken as risky and non-bankable, even though thehave default rate that is far less than that for Large Scale Enterprises (15% for SMEs against 65% foLarge Scale Enterprise). Despite strong figures favouring SMEs, financial institutions have been shof providing finance to SMEs because of following reasons:

Poor record keeping by SMEs, particularly accounting information and other businesdocumentation.

Low productivity and their inability to improve quality of products over time.

Poor operational performance.

Problems with packaging bankable loan requests by SMEs.

Limited knowledge of financing options for SMEs.

Lengthy and cumbersome application procedures, which discourage both SMEs and Banks.

High transaction costs owing to size of transaction, vis--vis volume of transactions whicdiscourages banks.

High turn around time owing to lack of timely and quality information from SMEs.

Lack of skills in banks for identifying needs and structuring the delivery of financial assistancto SMEs.

Lack of expertise in banks for appraising/structuring SME Projects.

Stringent collateral requirements and other banking regulations.

General risk aversion by banks.

All these factors have created a gap between lenders and SMEs. This has deprived SMEs from gettingfinancing for setting up, or the expansion of the business.


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SME Bank Ltd. is trying to bridge the gap between the financing needs of SMEs and their access tfinancing resources. SME Bank also provides Business Support Services in areas of;

1. Management2. Product innovation and development3. Quality control4. Acquisition of new technology

5. Product positioning6. Marketing7. Development of bankable business proposals

This support is expected to assist SMEs to improve their processes, product quality, effectiveness anmarketing skills. Similar support services can also be availed from SMEDA.

SME Banks Approach to Financing

Any commercially viable business proposal can qualify for banks financing. However, in the firsinstance the Bank tries to help and support enterprises,

1. Which use indigenous raw material2. Add value3. And are export oriented

LENDING PRODUCTS

Any commercially viable business proposal merits SME Banks support. It is Banks effort to assisand support enterprises that use indigenous raw material, add value and are export oriented. Suchenterprises are vital to our economy since these are labor intensive and thus create employmenopportunities.

SME Bank is reaching out to small and medium entrepreneurs through:

Working Capital & Medium-Long term financing

Program Lending (Hunarmand Pakistani Schemes)

Leasing through its subsidiary

Express Loans(English, Urdu)

Project Lending Scheme:

Project Lending Scheme is for those enterprises that are commercially viable and do not fall in thcategory of program lending scheme. Under this scheme working capital and medium-long term

financing facility is available for qualifying enterprises. The financing criteria and credit analysis fothis category of borrowers varies on case to case basis.

Program Lending Schemes:

The Program Lending Schemes are customized financing packages for sectors with SMconcentration. They are available for:

CNG Stations


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Women Entrepreneurs

Health Development (Doctors & Dentists)

Qingqi Rickshaws

Cutlery

Surgical

Fan Manufacturers Power Looms

Boat

Mata

Customized financing products for the following are also available :

Power Looms Up Gradation

Beaconhouse School Systems

Carpet Manufacturers

Gems & Jewellery

OEM (Original Equip't Manf's) Autoparts

The bank adjusts repayment of loans according to the turnover of the business while assessing thecash generation abilities of the business. Therefore, financing under the program lending schemethough generic in nature, can have customised terms and conditions which are suitable to theclients.

How to Apply for a Loan to SME Bank?

For obtaining financial services or assistance from the Bank, the applicant should fulfil the followincriteria or more specifically called the General Lending Criteria

General Lending CriteriaBorrowers

Banks 3 main requirements are:

1- A viable business plan2- Adequate debt equity1 ratio3- Acceptable securities

If you meet SME Banks lending criteria and have a sound business proposal that is commerciallviable, please apply for our assistance as follows:

1. Get an application form from one of our designated branches.

2. Fill it up with the required information.

3. If you need assistance in filling up the form, our staff will be there to help you.

4. After completing the form, kindly hand it over to our credit officer along with the requiredocuments. These documents have been listed in the application form.

1Generally, refers to the capital invested by the owner in the business and also includes any undistributed profits or reserves


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Sectors

The lending facilities are available for SMEs in the sectors of textiles, gems & jewellery, marble granite, cutlery, surgical, engineering vendors and any other viable/profitable enterprise.

Financing

SME Bank can provide financing within the range of Pak Rs.50,000.- to Pak Rs. 30 Million.Loan provided by the Bank will not exceed 60% of the forced sale value of collateral. At least 40% ofthe projects/enterprises financing should come from the borrower in the form of equity. Up to 60 %would be financed by SME Bank.

i.e, debt: equity ratio is 60:40

Mark Up

What a client pays to the Bank, in addition to the loan amount, is called the mark-up. This isnecessary to sustain the Banks activities. It is market based and depends upon the projectsexpected cash flows. It varies from business to business, but is in the range of 4% to 8% above the

GoPs 5-year PIB rate.

Repayment

The repayment of loan is linked to the cash flows of the project, which are separately projected by thbank. The banks projections are based on the business plan and the financial statements of thclient, which are provided at the time of submitting application for a loan. The repayment ischeduled according to the cash flow of the client. It could be either on monthly basis or quarterlbasis. However, the total repayment period does not exceed 7 years with varying grace period of upt12 months.

Collateral

Collateral forms are:

Acceptable forms of security are mortgage of property/house/building Hypothecation of stocks/machinery/equipment

Personal guarantees

The collateral requirements are as follows:

Securities

These include

Mortgage of land, building and fixed assets having approximate forced sale value 70%approx. of value of loan. Professional evaluator of banks choice assesses the forced salvalue.

Bank charge by way of hypothecation, pledge etc on moveable and other non-real estat

assets.

The bank carries out two types of mortgages


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1. Registered Mortgage

SME bank has assigned some areas to be negative and carries out registered mortgage in case ofthese areas. The bank registers the mortgage deed with the registrar of properties and the client hasto pay 2 % of the value of collateral. (1% stamp duty and 1% mortgage fee). Original documents of theproperty are also kept with the bank.

2. Equitable MortgageThis type of mortgage is for those clients who fall under the category of areas which are rated as A+ opositive by the bank. The client simply signs the mortgage deed and his original documents of thecollateral are deposited with the bank as security. This type of mortgage is cheap but normallyavoided by the bank.

Assignment of Rights

According to this the borrower shall have to assign rights to Bank on his:

Insurance monies.

Receivables etc.

Guarantees

The loan guarantees accepted by the bank are:

Personal guarantees of persons having capacity to repay the finance in case of default.

Trade Body or Corporate Guarantees

The guarantors shall have to give their NIC copy, copy of registry of property and sign the guaranteepaper. The bank judges whether the guarantor has worth equal to the amount of loan or not.


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The Loan Process

Step 1

The applicant has to fill a Business Proposal Form (Annex I) with different type of detaimentioned in it.

The credit department assesses the information filled in this form. If they find the informatiosatisfactory, the applicant is called for a meeting.

(The process may take a week for completion)

Step 2

The credit officer visits the business sight of the client to check the business viability of thproject. The client may be asked to provide the evidence of his cash flow to prove his worth e.gbooks of accounts, stock reports etc.

The applicant fills the Loan Application Form (Annex II) and submits to the bank along witfollowing documents.

o Business Plano Attested copy of NICo Property documentso Accountso Bank statemento Any other as advised by the concerned Credit Officer

After this credit department carries out the evaluation and appraisal of the loan request.

The bank obtains legal opinion certificate from the lawyer for the clearance of the title of client

property and gets the property evaluated from professional evaluator of their choice. If all this turns out to be acceptable, the case is forwarded to the Provincial Chief for fina

approval.(This process may take a month or two.)

Step 3

If the loan is not sanctioned the bank informs the customer about the fate of his applicationBank may or may not communicate reason for rejecting a grant of loan.

If the loan is sanctioned, then

1. In pre-disbursement stage legal documents are prepared and executed.

2. The collateral is mortgaged in banks favour.3. A cross cheque is issued or account is credit or overdraft is allowed.4. The business assets are insured i.e. stocks, machinery etc.

The total estimated expenses for the process

1. Banks Processing Fee Structure

Upto Rs.0.050 million NilFrom over Rs 0.050 million to Rs. 2 million 0.5% of loan amount.From over Rs. 2 million to 10 million Rs.15, 000


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From Rs. 10 million to 20 million Rs.20, 000Over Rs. 10 million Rs.25, 000

2. Mortgage Fee 2 % of the value of finance.

3. Legal Opinion Fee Rs.500-1,000

4. Evaluation Charges Rs.3, 0005. Insurance 0.5% of loan amount & 0.5% of value of collateral

Step 4

Effective Utilisation of Loan:

If you have revolving credit facility, withdraw funds only when desired. Try to credit account withyour daily sales. It will reduce the mark up cost and reflect good operational activity at the time onext loan review.

If you are availing term finance, to ensure payments on time try to match your cash flows withinstalments due date. In case, you foresee delay in payment of any instalment inform your bankupfront. This will establish your credibility.

Dont waste your money in any dubious transaction to make big money.

Dont waste money on purchase of non-productive assets.

Some Tips for Getting Finance

The borrower cannot borrow beyond 60% of the business value therefore, dont request a loabeyond that limit.

The value of short-term liabilities should not exceed the value of short-term assets; your accountshould reflect the same.

Always show the real picture of the business. Dont exaggerate since banks always find ways tassess the real picture.

If you need consumer finance to meet your personal needs, do not apply for a commercial loan.

Dont hide anything; be candid and honest in reporting. It will help establishing credibility.

Always operate through your bank account. A healthy turnover in the bank account will supporyour claims about future business prospects.

The banks normally take 2-3 months for the processing of loan, so plan early and be patienduring the process, but do follow-up progress on your application.


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Process Flow Chart

Business Proposal FormThe applicant fills business Proposal

Form.

Assessment of Business Proposal FormThe credit department assessinformation and if found satisfactory,calls applicant for a meeting.

Credit Officers Visit -The credit officer visits clients businessplace to verify the information provided

by him. Submits report to credit manger.

Loan Application FormIf credit officer is satisfied with clientsbusiness status/viability, he is asked tofill Loan Application Form.

Other DocumentsRequired

1. National IdentityCard Copy.

2. FinancialStatements/Accou

nts of past threeyears.

3. Salary Certificate& Bank Statement.

4. Last Wealth &Income Tax returnfiled.

5. Attested copy of

Property Evaluation & AppraisalCredit department carries out evaluationand obtains legal opinion certificate fromlawyer. Property is evaluated from

Provincial Chiefs ApprovalIf all acceptable, case is forwarded toProvincial Chief for approval of loanrequest.

Pre-disbursement StageIn this stage, legal documents areprepared by the Bank and executed.Collateral is mortgaged in bans favour.

Disbursement StageLoan is disbursed to borrower eitherthrough a cross cheque or accountcredited or over draft allowed. Business

Other DocumentsRequired

1. Original

Registry/Transfer letter.

2. Farad Milkiyat(FromPatwari/Tehsildar)

3. NonEncumbranceCertificate.

Loan is

refused

No

Loan isRefused

No


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Branch NetworkHead OfficeBox: 1587, Jang Building

40-K Fazal-ul-Haq RoadBlue AreaIslamabad-44000Tel: 92-42-9206652-54UAN: 111-110-011E-mail: [email protected]:www.smebank.org

Business Operations

LAHORE1. Lahore Main Branch

13-L, Mini Market,Gulberg-II.PH# (042) 5756224, 751226Fax# (042) 5756225UAN# (042) 111-11-00-11

2. Ravi Branch103, Ravi Road , Bati Wala Chowk.PH# (042) 7705901.

3. Edwards Road Branch Alamgir BuildingGround Floor17 Edwards Road (Mouj Darya road)Lahore City.PH # (042) 7221008-7220663

KARACHI1. Karachi Main BranchBahria Complex-II , MT Khan Road.PH# (021) 5610851-53,5610657Fax# (021) 5610854UAN# (021) 111-11-00-11

2. Gulshan BranchMumtaz Shopping Complex,Gulshan-e-Iqbal.PH# (021) 4813385.

ISLAMABADIslamabad Branch40-Jang Building ,Mezzanine Floor, Fazal-ul-Haq Road ,Blue Area.PH# (051) 9219260


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Fax# (051) 9213742

FAISALABADFaisalabad BranchP-341-B, Peoples Colony #1, Satyana road, Faisalabad.PH# (041) 9220481, 9220482, 9220484

Fax# (041) 9220483UAN# (041) 111-11-00-11.

PESHAWARPeshawar BranchState Life Building , Ground Floor, 24-The Mall.PH# (091) 9212350Fax# (091) 285177UNA# (091) 111-11-00-11

GUJRANWALAGujranwala Branch26-27-J,Trust Plaza , G.T.Road.PH# (0431) 9200443

(0431) 9200767Fax# (0431) 9200243UAN# (0431) 111-11-00-11

QUETTAQuetta BranchGround Floor,Usman Complex, Hali Road .PH# (081) 9202330,9202337Fax# (081) 9202386

UNA# (081) 111-11-00-11

SIALKOTSialkot BranchGround Floor,Al-Amin Building, Opp. SCCI Paris Road .PH# (052) 4266055Fax# (052) 4265041UAN# (052) 111-11-00-11

Recovery Offices

PUNJABAREA OFFICE RAWALPINDIWalayat Plaza, Murree Road,Opp. Daily "Assas" Office,Murree Road,Rawalpindi (City)PH# (051) 4456768, 4581713

Raza Building, Railway Road,


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Jeh lum

PH# (0541) 92702

C.M.H Road,Raw a la k o t ,

PH# (058710) 42543

AREA OFFICE LAHORE17-E. Edwards Road,Lahore CityPH# (042) 7243389 43-Allama Iqbal Road, Garhi Shahu,Lahore CanttPH# (042) 6370322

1st Floor, (Prime Bank Ltd)Prince Fan Colony, G.T.RoadGujra t

PH# (0433) 513242

136/2-C Satellite Town,S a r g o d h a

PH# (0451) 211511

AREA OFFICE MULTANSharif Plaza, LQM Road,Mul tan

PH# (061) 9200246, 9210181

189-Liaqat Road,

S a h i w a lPH# (0441) 220352

27-A, Stadium Road,Opposite Farid Gate, B a h a w a l p u r

PH# (0621) 9255393

S INDH

AREA OFFICE KARACHI801-802, 8th Floor, Park Avenue,

24-A, Block PECH, Shahrah-e-Faisal,Karachi (East)PH# (021) 4538041, 4314749

Badri Manzal, Rasal Road,Hyderabad

PH# (0221) 9200717

Main Military Road,


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S uk k ur

PH# (071) 30554, 31982

H#77, Badaruddin Colony,Near Circuit House,Dadu

PH# (0229) 611665

NWFPAREA OFFICE PESHAWARState Life Building,10th Floor, 34- The MallPeshawar Cantt,PeshawarPH# (091) 274997

Awan Huts, Lala Rukh Colony,

Mansehra Road,Abbot tabad PH# (0992) 9310159

BA LUCHIS T A NAREA OFFICE QUETTAGround Floor Usman Complex,Hali Road,QuettaPH# (081) 9202841


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Annex I

Page 1 of 4 of Annex I


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Annex I



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Annex I



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Annex I



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Annex II

Page 1 of 4 of Annex II


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Annex II



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Annex II



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Annex II
