CMSME Loan Portfolio Shrinks by Tk 16,184cr Amid High Interest Rates, Energy Crisis

In a striking departure from the historical trend of bank loan portfolios steadily expanding due to accrued interest, outstanding credit in Bangladesh's Cottage, Micro, Small and Medium Enterprises (CMSME) sector contracted by 5.15% in the first quarter of the year.

According to the latest data from Bangladesh Bank (BB), total outstanding loans in the CMSME sector fell to Tk 2,98,089 crore at the end of March from Tk 3,14,273 crore at the end of December. This represents a net reduction of Tk 16,184 crore in the first three months of the year, mainly because loan recoveries outpaced new disbursements.

Industry insiders said multiple macroeconomic challenges are weighing on both credit supply and demand. Lending activities have virtually ground to a halt at several financial institutions, including a number of Shariah-based Islamic banks. On the demand side, entrepreneurs are increasingly reluctant to take on new debt amid severe electricity and gas shortages and high interest rates. Concerns over the law-and-order situation have also discouraged new business investments, resulting in a slowdown in new ventures.

The stagnation is reflected in the broader economy, where overall private-sector credit growth fell to a historic low of 4.47%. When compared with the banking sector's current average lending rate of 11.92%, real credit growth has effectively turned negative.

Arif Hossain Khan, spokesperson and executive director of Bangladesh Bank, said, “The central bank has initiated various measures to boost loan disbursements. However, the overall macroeconomic environment is currently not conducive to borrowing.

The government is actively working to improve the electricity, gas and infrastructure situation. Once these issues are resolved, we anticipate an improvement in credit disbursement.”

The contraction poses a serious challenge to the country's employment goals. The National SME Policy mandates that banks and financial institutions allocate at least 27% of their total loan portfolios to the CMSME sector by 2029 to promote employment generation. The target for the current year stands at 25.50%.

Instead of moving towards these targets, the share of CMSME loans has continued to decline. By the end of March, CMSME loans accounted for just 15.87% of total bank credit of Tk 18,78,099 crore. The share was 16.76% in December, 18.40% at the end of 2024 and 19.11% at the end of the previous year.

The persistent decline has raised concerns over rising unemployment. To address the issue and fulfil its pledge to create 10 million jobs within its first 18 months, the BNP government announced a Tk 60,000 crore low-interest stimulus package. 
However, businesses have shown limited interest in the package, raising questions about whether the government's employment target can be achieved.

Bangladesh Bank's quarterly data show that banks disbursed Tk 52,108 crore in CMSME loans during the first three months of the year, while recovering Tk 65,291 crore. Although recoveries exceeded new disbursements, a significant portion of the total realizable loans, which stood at Tk 1,17,691 crore, remained unpaid.

As a result, the default rate in the CMSME sector rose to 26.04% in March from 24.03% in December. While the ratio is high, it remains below the banking sector's overall default rate of 32.26% at the end of March.

An institutional breakdown shows that Shariah-based Islamic banks recorded the highest CMSME default rate, with 43.97% of their CMSME portfolio classified as non-performing loans (NPLs) by March. They were followed by state-owned commercial banks at 42.73%. Specialized banks recorded a default rate of 22.58%, private commercial banks 14.15%, and foreign banks 4.60%.
Despite recently grappling with severe operational challenges and irregularities, Islami Bank Bangladesh PLC has returned to the country's top five CMSME lenders, ranking behind BRAC Bank, Pubali Bank and City Bank.

Asked about the strategy, Altaf Hossain, acting managing director of Islami Bank, said the sector remains resilient.
“Recovery rates within the micro and medium enterprise segments are highly satisfactory. Furthermore, small-ticket loans generate substantial employment opportunities, making them crucial for mitigating joblessness. This is why Islami Bank is renewing its strategic focus on CMSME disbursements,” he said.

He added that Islami Bank has historically been a leading provider of SME financing and currently holds the largest outstanding balance in the sector, despite the operational disruptions it experienced recently.