Why Collateral-Heavy Lending Is Stalling Bangladesh's SME Sector Growth

SME credit contracts as collateral bind persists

Bangladesh's formal lending channel to small and medium enterprises contracted sharply in the January–March quarter, with bank disbursements falling to Tk52,000 crore from Tk70,000 crore in the preceding quarter — a 25.74% sequential decline, according to The Business Standard. The pullback arrives against a backdrop of structural frictions that keep SME credit concentrated among asset-heavy borrowers, while women-led enterprises remain underfunded despite concessional refinancing windows.

The macro picture

SME loans now stand at Tk2.98 lakh crore, equivalent to 15.87% of total bank lending. Within the segment, however, classified exposure accounts for 26%, a ratio that continues to weigh on lender risk appetite. For institutions, the unit economics of small-ticket credit remain unfavorable: underwriting a Tk5 lakh or Tk10 lakh facility demands procedural rigor comparable to a substantially larger corporate loan, while margins compress proportionally. The result is a collateral-driven allocation mechanism that systematically excludes viable but asset-light operators, including women-led and rural enterprises with documented sales histories.

Gender gap and the appraisal framework

Women received between 4% and 6% of total SME lending between FY2020-21 and FY2022-23, against a policy target of 15%, with the latest figure placing their share at 7.28%. Bangladesh Bank has introduced dedicated refinancing windows priced at 5% — roughly 400 basis points below standard commercial lending rates near 9% — yet uptake remains constrained by collateral documentation rather than cost. Lenders interviewed in the report argue that concessional rates alone are insufficient: parallel investment in financial literacy, digital bookkeeping, and market-linkage programs is required to shift the appraisal framework from title-based to cash-flow-based underwriting. Former Bangladesh Bank SME Department director Nazrul Islam described SMEs as a major pillar of the private economy spanning food processing, retail, transport, handicrafts, agriculture, and technology, underscoring the breadth of activity currently screened out by existing criteria.

What to watch

The quarterly disbursement trajectory offers the cleanest read on whether bank behavior is adjusting. A reversal of the 25.74% sequential contraction, combined with movement in the women-lending share toward the 15% policy benchmark, would signal material recalibration of the credit-allocation framework. Conversely, persistence of the classified-loan ratio near 26% will keep risk-weighted pricing elevated, prolong the collateral bind, and cap the segment's contribution to employment and output growth. Market participants should monitor Bangladesh Bank's forthcoming policy guidance on appraisal reform and the next quarterly lending release for directional confirmation.