New Central Bank Measures Target Agriculture and SME Loan Growth

Bangladesh Bank has announced further regulatory relief to encourage increased lending to agriculture and cottage, micro, small and medium enterprises (CMSMEs), as part of broader efforts to stimulate employment and support grassroots economic activity. The latest measure involves a reduction in the required rate of loan-loss provisioning that banks must maintain against certain categories of loans in these sectors.

The central bank issued a formal circular on Sunday, confirming that banks will now be allowed to set aside significantly lower security provisions against eligible short-term agricultural loans and CMSME industrial loans. Officials at the regulator expressed optimism that the move would make lending to these traditionally underserved sectors more attractive for commercial banks.

Under existing banking regulations, financial institutions are required to maintain loan-loss provisions from their operating profits to guard against potential defaults. By lowering the provisioning requirement, the new policy effectively reduces banks’ costs and improves profitability, thereby creating additional incentives to expand credit portfolios in priority sectors.

According to the circular, banks are currently required to maintain provisions at the rate of 1 per cent for standard loans and 5 per cent for loans classified as Special Mention Accounts (SMA). However, under the revised guidelines, banks will be permitted to maintain provisions at a reduced rate of 0.50 per cent—down from 1 per cent—against all unclassified (standard and SMA) short-term agricultural loans and CMSME industrial loans. This concession will remain valid until 31 December 2026.

Senior Bangladesh Bank officials stated that the decision was taken in response to slowing credit growth in large industrial groups, alongside banks’ growing reluctance to lend to agriculture and CMSME sectors amid economic uncertainties. The regulator believes that easing prudential requirements will help reverse this trend and channel funds towards productive sectors with high employment potential.

The policy shift also follows sustained lobbying by the Association of Bankers, Bangladesh (ABB), which had formally requested the central bank to relax provisioning rules. The issue was further discussed in meetings between senior bankers and Bangladesh Bank Governor Ahsan H Mansur, along with other high-ranking officials, paving the way for the latest decision.

The move is particularly significant given the government’s ambitious lending targets for CMSMEs. Authorities have set a goal for banks to disburse at least 25 per cent of their total loan portfolios to the CMSME sector within the current year. However, data up to June show that CMSME loans account for only 17 per cent of total bank lending—lower than levels recorded over the previous two years.

Looking ahead, the National SME Policy has set a longer-term target of allocating 27 per cent of total bank credit to the CMSME sector by 2029. For 2025, the interim goal remains 25 per cent. Policymakers argue that expanding access to finance for agriculture and small enterprises is critical to generating higher levels of employment and ensuring more inclusive economic growth.

Key Changes in Loan Provisioning Rules

Economists view the latest relaxation as a timely intervention, though they caution that effective monitoring and risk management will be essential to ensure that increased lending translates into sustainable growth rather than higher default risks.