Bank credits to CMSMEs hit fresh compliance hurdles

Access to formal credits by cottage, micro, small and medium enterprises is strewn with fresh hurdles stemming from ramped-up general provision requirement that discourages commercial banks from such highly supervised lending.

Such regulatory change in general provisioning came at a time when most commercial banks in Bangladesh have been rebalancing their investment portfolios with high focus cast on funding to CMSMEs to avoid corporate-lending-dominating non-performing loan (NPL) buildup in the banking industry.

Under the recently changed requirement with effect from April last, the commercial banks are now required to keep 1.0 per cent as general provisioning against each CMSME-segment loan. Before the revision, banks would keep 0.25 per cent as general provision against such financing, according to sources at the central bank.

Concerned over the limiting of bank credits to the most vibrant economic segment, a Bangladesh Bank official, on condition of anonymity, said banks normally keep 0.25-percent general provision against lending to CMSMEs, and 1.0 per cent in other areas.

Complying with a condition of the International Monetary Fund (IMF) as part of a package deal on its $5.50-billion lending to stabilise the country's macroeconomic situation, the official said, the provision changed as lenders were instructed to keep 1.0-percent general provision against CMSME lending as well.

"The unexpected change might dampen the banks' focus on the CMSMEs as far as lending is concerned. Ultimately, it would slow down the fund flow further to the key economic segment where major share of the country's overall employment is involved," says the central banker.

According to BB data, the ratio of CMSME credits as percentage of total loans in the banking sector was 21 per cent in 2020. Afterwards starts the rollback--down to 19.80 per cent, 19.54 per cent, 19.12 per cent and 18.40 per cent in 2021, 2022, 2023 and 2024 respectively.

The climb-down continues, with the share having dropped to 16.84 per cent until March 2025.

The BB sources said the Association of Bankers, Bangladesh (ABB), an apex body of top bank executives, recently sent a letter to BB governor Dr Ahsan H. Mansur to convey its concern over the up-scaling of provisioning.

Talking to The Financial Express, ABB chairman Mashrur Arefin said the change in provisioning would badly impact loan disbursement to the CMSMEs as the fund flow to the vital sector continues falling.

Mr. Arefin, also managing director and chief executive officer of City Bank PLC, mentions that the loan-disbursement ratio to the productive sector dropped to 36.61 per cent now from 37.29 per cent recorded several months ago.

Under such circumstances, the seasoned banker suggests, the regulator should uphold the previous provisioning requirement like the NBFIs (non-bank financial institutions) implementing the new classification structure in the CMSMEs.

He also feels that the provisioning in standard loans (overdue in less than two months) should be 0.25 per cent in place of 1.0 per cent, special mention accounts (overdue in-between 2-3 months) instead of 5.0 per cent, substandard loans (overdue in-between 3-6 months) 5.0 per cent in place of 20 per cent, doubtful loans (overdue in 6-12 months) 20 per cent instead of 50 per cent and bad loans (overdue over 12 months) 100 per cent.

Additional managing director and head of SME banking of BRAC Bank Syed Abdul Momen thinks the new regulation, especially in general provisioning, "might discourage the banks from dealing with the highly supervisory credits".

Earlier, he mentions, the commercial banks kept 0.25 per cent as general provision against CMSMEs financing and the lender could use the remaining 0.75 per cent as loan-able credits.

"Now, the banks have to keep 1.0 per cent, which will definitely reduce the lending capacity of the banks."

The ABB leaders plan to meet the BB governor tomorrow (Wednesday) in hope of remedy for assuaging concerns of the bank executives.

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