Small and medium enterprises (SMEs), usually located in rural districts, continue to pay more for bank loans than large corporates, although the authorities often claim to prioritise easy and affordable credit access for these businesses.

Finance Adviser Salehuddin Ahmed said yesterday that SMEs continue to be the "backbone" of the Bangladesh economy and employment.

Official estimates support the adviser. More than 1.18 crore SMEs run across the country and contribute about 30 percent to the gross domestic product. These businesses employ around 2.40 crore people, and 70 percent of them are located outside the capital.

Despite this, banks charge SMEs interest rates ranging between 13 and 15 percent, among the highest across all sectors except services.

According to the Bangladesh Bank, the weighted average interest rate for SMEs was 12.49 percent in April this year. In comparison, agriculture faced a rate of 11.98 percent, large industry 12.45 percent, and services 12.75 percent.

Bankers say commercial lenders impose higher rates on SMEs because of increased operational costs.

"SME loan interest rates are usually 1.5 to 2.5 percentage points higher than corporate loans due to higher operational costs," said Kamrul Mehedi, head of small, microfinance and agent banking and deputy managing director at City Bank Limited.

He said SME clients are scattered across regions outside Dhaka, which raises management costs.

According to him, processing charges are also proportionately higher, as smaller loans cannot absorb fees the way large corporate loans can.

He added that many SMEs avoid visiting branches, creating a need for more personalised service and increasing costs further.

Arief Hossain Khan, spokesperson of the Bangladesh Bank, acknowledged that SME loans carry higher interest rates than other term loans because of the operational expenses.

Still, he said the central bank encourages commercial banks to bring down these rates.

Kazi Iqbal, senior research fellow at the Bangladesh Institute of Development Studies (BIDS), said SME loans are costlier to handle and come with more risk, leading to higher charges.

BURDEN OF RISING RATES

Md Oli Ullah, who runs an agricultural machinery workshop in the southwestern district of Chuadanga, employs 100 workers at his Janata Engineering factory. The factory makes corn threshers and mustard oil extraction machines.

Ullah took a Tk 5 crore cash credit (CC) loan from Agrani Bank in 2020 at 9 percent interest.

He used to repay Tk 9 lakh per crore each year. With the interest rate rising to 14 percent in the last year, his annual repayment rose to Tk 14 lakh.

"It abruptly increased my quarterly repayment pressure. Now I am struggling with the rising interest rates," said the small manufacturer.

His business has slowed over the past year, and he now fears he may have to lay off workers.

Ajit Kumar Das, who owns a jute textile mill in Narsingdi, said strong demand for eco-friendly jute bags has helped him sustain his business. However, he said higher interest rates have eroded his profit margins.

Both entrepreneurs said that higher borrowing costs amid economic uncertainty threaten jobs and business stability.

Official data support this concern.

The disbursement of loans to cottage, micro, small and medium enterprises (CMSMEs) declined by 3.49 percent year-on-year in the October to December quarter of FY2024-25.

Banks disbursed Tk 62,581 crore during the quarter, down from Tk 64,842 crore in the same period of the previous fiscal year, according to the Bangladesh Bank.

CHALLENGES IN LENDING

Bankers say loan recovery rates from SMEs are as high as 99 percent. Despite that, many commercial lenders are reluctant to lend to them.

Trade leaders point to flaws in the credit assessment system. They also highlight several structural issues, such as banking concentration in Dhaka, limited outreach to rural areas, a lack of expertise in assessing SME borrowers, and disproportionately high loan processing fees.

"High operational costs and risk make it difficult to keep SME interest rates low," said Ashraf Ahmed, former president of the Dhaka Chamber of Commerce and Industry (DCCI).

For example, he said processing a Tk 1 lakh loan for a small business can cost a bank Tk 10,000, or 10 percent of the loan value. In contrast, processing a Tk 100 crore corporate loan costs just 0.004 percent.

SME lending requires extensive branch networks and higher monitoring expenses, unlike corporate loans that are managed centrally. "These factors push banks to shy away from SMEs and charge them with higher rates," he said.

Abdul Momen, additional managing director and head of SME banking at BRAC Bank, said they charge between 13 and 15 percent under the market-based interest system, which is still lower than many other banks.

"We aim for affordability despite higher costs from our relationship-based model," said Momen.

BRAC Bank is one of the country's leading SME financiers, with a loan portfolio exceeding Tk 32,000 crore and nearly 2.5 lakh clients. According to Momen, about 90 percent of its SME loans go to micro and small entrepreneurs who are usually ignored by traditional banks.

"It is because our founder envisioned a financial system for these underserved groups."

Still, BRAC Bank usually lends between Tk 15 lakh and Tk 50 lakh, while the Bangladesh Bank policy allows loans up to Tk 10 crore for SMEs.

'GOVT NEEDS TO DO MORE'

Mushfiqur Rahman, chairperson of the SME Foundation, said micro and small businesses struggle to access affordable loans due to high interest rates, strict collateral requirements, and cautious lending by banks.

To ease this, the foundation launched a credit wholesaling programme in 2009 that offers 9 percent loans, and also channelled stimulus funds during the Covid pandemic.

Women entrepreneurs now receive between 25 and 30 percent of the loans disbursed.

However, Rahman said outreach remains limited due to inadequate funding, despite a loan recovery rate of nearly 100 percent.

"With 70 percent of 1.18 crore entrepreneurs located outside Dhaka, broader coverage is essential," he said, calling for more government support.