Asset quality in the cottage, micro, small, and medium enterprise (CMSME) segment took a visible hit in the first quarter of 2026, driven by a sharp contraction in total outstanding credit coupled with an expanding volume of non-performing loans.
According to the Bangladesh Bank (BB) data, the classified loan ratio across the CMSME portfolio reached 26.04 per cent at the end of March 2026, up from 24.03 per cent recorded in December 2025.
The data points to a double-edged effect that drove the sharp percentage surge during the January-March quarter.
CMSME outstanding loans stood at Tk 2.98 trillion on March 31, 2026, reflecting a decline of 5.15 per cent from the preceding quarter and 1.35 per cent from the corresponding quarter of the previous year.
The total CMSME outstanding loans stood at Tk 3.14 trillion in December 2025, the data shows.
Private commercial banks accounted for nearly 52 per cent of the total CMSME outstanding loans, which was the largest share.
Islamic commercial banks and state-owned ones held about 20 per cent and 19 per cent of the total CMSME outstanding loans, respectively.
Finance companies, specialised banks, and foreign banks accounted for the remaining 4.31 per cent, 3.12 per cent, and 1.66 per cent, respectively.
Senior commercial bankers attributed this pull-back to tighter risk parameters, sluggish new disbursements, and aggressive quarterly recovery drives.
Despite the total credit shrinking by roughly Tk 160 billion over three months, default loan volumes expanded in absolute terms, indicating that small-scale borrowers continued to struggle with elevated input costs and tight cash flow.
The recovery rate of January-March 2026 was lower than that of the immediately preceding quarter but more than that of the corresponding quarter of the previous year.
The recovery rate reported for the January-March 2026 period was 55.48 per cent as Tk 652.91 billion was recovered against Tk 1.18 trillion recoverable.
Under the latest SMESPD Master Circular No 01/2025, banks and finance companies are required to raise their CMSME loan portfolio to at least 25.50 per cent of the total outstanding loans and advances by 2026, with further sub-targets on enterprise size, gender, and sector mix.
However, during January-March 2026, Tk 521.08 billion was disbursed as CMSME finance to 386,453 enterprises.
Compared with the corresponding quarter of the preceding year, the amount disbursed increased by 8.98 per cent from Tk 478.13 billion, while the number of enterprises financed increased by 19.37 per cent from 323,734.
Industry experts caution that while credit discipline is vital, a sudden squeeze on credit flows could further choke off recovery prospects for micro and small enterprises, which account for the vast majority of private sector employment in Bangladesh.
The latest quarterly movement underscores an urgent need for targeted recovery follow-up, selective restructuring of viable loan facilities, and sustainable lending practices to maintain a balanced CMSME portfolio, they say.
Syed Mahbubur Rahman, managing director of Mutual Trust Bank, says the rising classified-loan ratio reflects stress in the CMSME sector, worsened by inflation, weak demand, and rising costs.
He stresses that banks should not scale back lending but instead engage more closely with borrowers.
Besides, he points out that while data-driven credit assessment is vital, the market suffers from a lack of reliable SME data.
Partnerships with fintechs could help, but their datasets remain immature and fragmented, requiring caution, he says.
In this context, Rahman has urged banks to rely on continuous monitoring and offer restructuring or repayment flexibility to enterprises with sound prospects but temporary liquidity issues.
At the same time, he has called for stronger recovery efforts to contain defaults and emphasised the need to improve financial literacy among entrepreneurs, many of whom struggle with debt and cash flow management.
Rahman concludes that adequate financing for CMSMEs is essential for sustainable growth and resilience, and banks must balance prudent risk management with supportive lending practices while gradually building better data ecosystems.
Dr Masrur Reaz, chairman at Policy Exchange Bangladesh, says the increase in the CMSME classified loan ratio signals that many small businesses are still struggling to recover from prolonged economic pressures, including high financing costs, inflation, and subdued domestic demand.
While banks must maintain prudent lending standards, an excessive tightening of credit could further weaken the country's most employment-intensive sector, he says.
The priority should be to improve credit appraisal, support viable borrowers through restructuring where necessary, and strengthen recovery mechanisms rather than simply reducing exposure to CMSMEs, Dr Reaz adds.
