A sharp slowdown in loan recovery, coupled with uneven credit growth, is raising fresh concerns over the health of Bangladesh's Cottage, Micro, Small and Medium Enterprise (CMSME) financing sector, despite a continued rise in outstanding loans across the banking system.
Latest data from Bangladesh Bank (BB) showed that CMSME loan recovery declined sharply by 31.5 per cent year-on-year to Tk 358.64 billion during July-September of FY26, down from Tk 523.61 billion in the corresponding period of FY25.
The decline was visible across both state-owned and private commercial banks.
Recovery by state-owned banks fell to Tk 26.02 billion in the first quarter of FY26 from Tk 41.85 billion in the same period a year earlier.
Similarly, private commercial banks, which dominate CMSME financing, recovered Tk 300.99 billion during July-September FY26, compared with Tk 439.03 billion in the corresponding quarter of FY25, according to central bank data.
Bankers and analysts say the sharp drop in recovery indicates growing repayment stress among small businesses amid persistent economic challenges, rising operational costs and slower business activity.
The trend has also raised concerns about the overall quality of SME credit portfolios.
Despite weaker recovery performance, CMSME loan disbursement posted moderate growth.
Banks disbursed Tk 481.44 billion in CMSME loans during July-September FY26, marking an 8.92 per cent increase from Tk 442.02 billion in the same quarter of FY25.
However, quarterly lending momentum weakened as disbursement declined by 5.31 per cent from the preceding April-June quarter, reflecting cautious lending behaviour by banks amid rising default risks and liquidity pressures.
On a yearly basis, the sector's financing trend remained under pressure.
Total CMSME loan disbursement dropped to Tk 2.05 trillion in FY25 from Tk 2.251 trillion in FY24, indicating a broader contraction in lending to small businesses despite occasional quarterly improvements.
Meanwhile, outstanding CMSME loans continued to rise, reaching Tk 3.12 trillion at the end of September FY26. CMSME loans accounted for 17.02 per cent of the country's total outstanding loans during the period.
At the same time, total outstanding loans in the banking sector stood at Tk 18.35 trillion during July-September FY26, reflecting continued overall credit expansion in the economy even as SME financing showed mixed trends.
The data also highlighted the overwhelming dominance of private commercial banks in CMSME financing.
Private banks accounted for 73.80 per cent of total CMSME lending, underscoring their central role in SME credit delivery while also reflecting the relatively limited participation of state-owned banks in supporting small enterprises.
Overall, the latest figures portray a fragile CMSME financing environment where rising outstanding exposure coexists with weakening loan recovery and uneven disbursement trends, signalling persistent vulnerabilities in Bangladesh's small business sector and growing caution within the banking industry.
Contacted, Dr Masrur Reaz, chairman of Policy Exchange Bangladesh, said the sharp decline in CMSME loan recovery reflects mounting financial stress among small businesses amid persistent inflationary pressure, higher operating costs and weak market demand.
He pointed out that while credit flow to the sector has continued, the quality of lending and repayment capacity of borrowers remain key concerns for the banking sector.
Dr Reaz also stressed the need for more targeted policy support, easier access to finance and stronger monitoring mechanisms to ensure sustainable growth of the CMSME sector.
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