which emanates from the nature of economic cycles. credit booms inevitably lead to higher npls in subsequent years. the loan portfolio of the banking sector registered an annual average growth of over 20. 0 percent in recent years ( cy02 to cy07 ). some correction in the loan portfolio was, therefore, to be expected. also, the build - up of macroeconomic pressures which eventually led to a slowdown in economic growth in fy09 aggravated the increase in npls of the banking system. this is a cyclical process and is expected to stabilize with the improvement in macroeconomic fundamentals. sensitivity analysis by the sbp suggests that the banking sector is well placed to withstand credit risk shocks of a modest nature. the provisioning coverage ratio of around 70 percent at end march 2009 also shows a prudent and proactive approach towards credit risk management. secondly, competition from nss instruments offering a relatively higher rate of return has put increasing pressure on banks ’ deposit generation capacity. since the beginning of fy09, nss instruments have seen a net inflow of rs 206. 7 billion, as compared to rs. 86. 6 billion in fy08. on one hand this augurs well in substantiating financial savings and meets the government ’ s objective of raising funds for deficit financing from non ‐ bank sources. however it does also imply that banks need to make concrete efforts to ensure sustained deposit growth by tapping the unbanked market, increasing financial penetration and facilitating the process of financial intermediation. third, given the associated pressure on profitability levels, small banks faced the challenge of meeting the minimum capital requirements ( mcr ) specified by the state bank of pakistan in 2008. in response to the challenges in the macro - financial environment, we have rationalized the mcr and the time period in which it needs to be implemented, thus providing breathing space to the industry in difficult conditions, fostering competition and a levelplaying field in the industry. notwithstanding these developments, banks in pakistan are meeting the financing demands of not just the private sector, but as seen in the recent past, of the public sector enterprises as well. private sector credit to gdp ratio has declined from 26. 2 percent in fy08 to 20. 2 percent by april fy09. such developments reinforce the need for diversification in the available financing options. one of the most illustrative examples of the grave implications of a skewed

yaseen anwar : sme banking keynote address by mr yaseen anwar, governor of the state bank of pakistan, at a roundtable on “ sme banking ”, jointly organized by the state bank of pakistan and the international finance corporation ( ifc ), karachi, 16 january 2013. * * * mr. kaiser naseem & mr. andrew mccartney from ifc, distinguished presidents of commercial banks ladies and gentlemen, good morning! let me extend a very warm welcome to all of you to this roundtable on the important subject of “ sme banking ”, jointly organized by state bank of pakistan and ifc. i would like to especially welcome and thank the sme banking experts from ifc who have traveled from abroad to conduct this important session for the top management of the banking industry of pakistan. this roundtable is indeed a significant event as we have representation of all the major banks that contribute more than 90 % of the total sme lending in the country. the objective of today ’ s proceedings is twofold ; first, to take stock of the issues confronting the sme sector, and second, to learn and deliberate on the various successful strategies and sme banking models practiced globally by lending institutions. i am sure everyone around the table believes that sme development plays a key role in the economic development of a country. in pakistan, the sector contributes 30 percent towards gdp, employs more than 70 percent of the non - agricultural workforce and generates 25 percent in export earnings. the sector has huge potential in generating employment and poverty alleviation in the country. therefore, sbp is actively promoting sme finance under the broader agenda of increasing financial inclusion in pakistan. the governments around the world support small scale agriculture, services and manufacturing sectors through a number of initiatives because of their labor - intensiveness and employment generation potential for poverty reduction. these countries have also successfully integrated their smes with the large corporate sector through sub - contracting which has proved an extremely useful way of integration across size and scale. in pakistan, despite the immense significance of the sme sector, it remains largely financially excluded, as reflected from the declining trend in sme finance over the years, constituting only 8 % of the banks ’ total advances as of june 2012, down from 16 % in june 2007. unfortunately, this ratio is quite low compared to our regional peers such as in india, sri lanka and even bangladesh. a closer look at the sme sector reveals that there are various issues on both demand and