PMYBL is floundering

According to a Business Recorder exclusive private commercial banks as well as provincial banks are dragging their feet with respect to implementing Prime Minister’s Youth Business Loan Scheme (PMYBL) in spite of their earlier commitments. The State Bank of Pakistan (SBP) is reportedly proactively following up with the banks through letters and telephones but has reportedly received no response.

The SBP reported this week that it would guarantee participation of private banks in the scheme on the basis of soundness of business proposals as well as encourage them to build this portfolio commensurate with their size and arrange appropriate training for them to implement the scheme. However, National Bank of Pakistan (NBP) and the First Women Bank Limited (FWBL) would take the lead and the SBP noted that these two banks were appointed to act as its agents for the disbursement of loans of 2 million rupees for small businesses under the PMYBL and they would operate under the guidance and supervision of the central bank.

The PMYBL was announced by the Prime Minister last January, a year ago, while its modalities were finalised by November 2014. The target beneficiary group was to be the educated unemployed youth (defined as between the ages of 21 and 45 with 50 percent loans earmarked for women) though the plan was not to be restricted to this group. A viable business plan was required to be prepared and the borrower had to prove his/her ability to start up or expand his/her own business with relevant experience. Financing limit would be from Rs 5 lakh to Rs 20 lakhs with the maximum amortisation period of 7 years (though it would vary from loan to loan). The interest payable would be 8 percent per annum, which would begin to be payable after one year. Any rate of return higher than 8 percent would be paid by the federal government according to the scheme and the processing time would not exceed 15 days.

An additional condition for the loan was to provide security ranging from 500,000 to 749,999 rupees to be secured against hypothecation of stocks/assets as well as two personal guarantees of high net creditworthy individuals, including a government official of grade 17 or above. It is unclear why a grade 17 was so defined given that an official of that grade or even higher may not be creditworthy if he/she relies solely on his/her pay. Be that as it may, for borrowers of 750,000 to 20 lakh rupees the loan would be secured against tangible securities including lien on deposit certificates, jewellery, property mortgage etc.

Why the borrowers would be unable or unwilling to borrow under these terms has become fairly evident by now. Frequent criticisms raised are as follows: if I or my family have the collateral why would we borrow at 8 percent interest? A BA or even in some cases an MA degree does not necessarily generate the capacity to prepare a business plan? How would I – an unemployed youth – get a creditworthy guarantor other than a close family member? Free application forms may facilitate the process but the accompanying documents would take the typical applicant months if not years to complete.

However, not so easy to determine is the banks’ reluctance to launch this scheme given that the terms and conditions are not too different from what banks employ to extend loans. Surveys carried out revealed that banks regard extending loans under PMYBL as risky and they base this assessment on previous such schemes launched by the PML-N when in power with particular reference to the yellow cab scheme. Critics of the scheme have been many with initially the focus being on the appointment of Maryam Nawaz as chairperson of the scheme, a role that she resigned from subsequent to a court decision.

One would assume that the objective of the scheme is to promote micro and small-scale business enterprises that form the backbone of any economy, however, its provisions need a revisit and perhaps the focus must be on microfinance initially with the business assets that are procured from the borrowed amount used as collateral. Later it can be slowly expanded to small-scale enterprises and finally to medium-scale enterprises. Or in other words, Grameen Bank of Bangladesh must be used as a role model focused on extending credit to the poor (who have no access to credit at present) and given the rise in poverty in recent years this would be a good start. In addition, Grameen Bank also relies on public donations and that may also be a place to start in terms of generating the necessary capital.