Banks lean in on loans to SME sector

Due to various steps taken by the central bank to provide loans at interest rates lower than the prevailing market rates, besides various other efforts of the banks, the disbursement of loans to the Small and medium-sized enterprises (SMEs) sector is on the rise. 

Large loans to the industrial sector, by definition, have fewer beneficiaries. Besides, when large loans become non-performing loans (NPL), the entire banking sector takes a hit. There are many precedents of even good banks getting in trouble because of just a few bad loans. Due to the culture of disbursement of large loans, the NPLs of Bangladeshi banks have increased significantly.

On the other hand, SME loan sizes are much smaller than industrial ones. As the loan amount is divided into small portions, the risk of the bank is reduced a lot. Even if one or a few loans become NPL, the health of the bank is not affected much. 

Besides, the NPL ratio is low in the SME sector. Banks are now leaning towards SME loans due to these reasons. There are banks that have doubled the amount of SME loans in total loans in the past year.

According to central bank data, SME loan outstanding in the banking sector has increased by about Tk15,000 crore in the last one year. Outstanding loans in the sector stood at Tk2.44 lakh crore at the end of the March quarter this year. It was Tk2.29 lakh crore in the same period last year. That is, the loan growth in this sector has been 6.51% in one year.

The central bank is also taking various steps to increase SME loans. Bangladesh Bank asked banks and non-bank financial institutions to raise their loan disbursement ratio for cottage, micro, small and medium enterprises (CMSME) to 25% of their outstanding loans by 2024. 

Bangladesh Bank has a Tk3,000 crore scheme titled "Small Enterprise Refinance Scheme for Women Entrepreneurs'' to achieve at least 15% of the net credit and advance status of the CMSME sector to women entrepreneurs by 2024. Under this scheme women entrepreneurs get loans at a maximum of 5% interest/profit. 

At present, almost all commercial banks are focusing on the SME sector. Several private banks in particular have been successful in disbursing loans in this sector. One of them is private sector-owned BRAC Bank. More than 50% of their entire loan portfolio is invested in the SME sector. About 30-32% of the remaining loans are in the corporate commercial sector and 17-18% in the retail sector. 

Selim RF Hussain, chairman of the Association of Bankers Bangladesh (ABB) and managing director and CEO of Brac Bank said, "we believe that investment in the SME sector is sustainable and makes the biggest contribution to our country's economy or society. We have disbursed loans worth over Tk14,500 crore to around 166,227 SME customers in 2022." 

Discussing the future prospects of the country's SME sector, he also said that after the Second World War, countries like Germany and Japan showed how an economy could be made stronger through the SME sector, even after the devastation of a war. 

It is said that the SME sector contributes 25% of our country's GDP. This is old data. At present, this rate is higher. Employment is also high in the SME sector. That is, the development that is happening in the country is spreading to the marginal areas through the SME sector. If a developing country like Bangladesh has to accelerate the pace of development, it has to be done through the SME sector.

In addition to private banks, state-owned banks also aim to increase lending to the SME sector. Among them, Sonali and Agrani Bank are performing well in such loan disbursements.

Md Afzal Karim, Managing Director and CEO of the state-owned Sonali Bank told TBS that they set different annual targets for SME loans. 

"We have oversight to achieve this. We are moving towards the goal very fast. Eight percent of our loan portfolio in 2021 was in the SME sector. Now it is more than 14.5%. If a good entrepreneur in the SME sector comes to us for a loan, no matter how small, we finance them. We are giving loans up to Tk10 lakhs without collateral, and Tk75 crores with collateral in these sectors. We have seen that if supervision is good in SME loans, NPLs are very low." 

Md Murshedul Kabir, managing director (MD) and CEO of Agrani Bank said among the state-owned banks, Agrani Bank has the highest outstanding SME loans. 

"We are trying to expand SME lending in urban as well as rural areas of the country. All our zonal and local branches have been instructed to give priority to disbursement of SME loans. Besides, supervision and governance has been enhanced in disbursement of loans, so that the loans given in this sector are properly recovered."