Central Bank Cuts Provision Requirements to Boost Farm, SME Loans

Bangladesh Bank has announced further regulatory relaxations aimed at increasing the flow of credit to agriculture and the cottage, micro, small and medium enterprise (CMSME) sector, signalling a renewed push to stimulate employment-generating segments of the economy. The central bank has reduced the rate at which banks must maintain loan-loss provisions against certain categories of loans, effectively lowering the cost of lending and encouraging banks to expand credit in these priority sectors.

In a circular issued on Sunday, Bangladesh Bank confirmed that banks will now be required to maintain significantly lower provisioning against eligible agricultural and CMSME loans. Senior officials of the regulator expressed optimism that the move would make banks more willing to extend credit to farmers and small entrepreneurs, particularly at a time when lending to large industrial groups has slowed.

Loan-loss provisioning is set aside from a bank’s operating profit to cover potential defaults. A reduction in provisioning requirements therefore directly supports banks’ profitability, creating additional room to expand lending portfolios without placing undue pressure on balance sheets. Regulators believe this incentive will shift banks’ focus towards sectors that have traditionally faced constraints in accessing finance.

Under existing regulations, banks are required to maintain provisions at the rate of 1 per cent for standard loans and 5 per cent for loans classified as Special Mention Account (SMA). According to the new directive, until 31 December 2026, banks will be allowed 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 that fall within the CMSME framework. In effect, the provisioning requirement for these loans has been halved.

Central bank officials noted that the decision was taken to encourage banks to increase disbursement of short-term agricultural credit and loans to CMSME enterprises. In the current economic environment, lending to large corporate groups has declined, while banks have also shown reluctance to expand credit to agriculture and small businesses. The regulator hopes that the latest relaxation will help reverse this trend.

The demand for easing provisioning norms had earlier been formally raised by the Association of Bankers, Bangladesh (ABB), the apex body representing chief executives of banks. The issue was also discussed in meetings between senior bankers and Bangladesh Bank Governor Ahsan H Mansur, along with other top officials. Following these consultations, the central bank moved to implement the revised policy.

From a broader policy perspective, the government has set ambitious targets for increasing CMSME lending. Banks are required to allocate 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 outstanding credit—lower than levels recorded in the previous two years. In line with the National SME Policy, the government aims to raise this share to 27 per cent by 2029, with an interim target of 25 per cent by 2025.

Expanding credit to agriculture and CMSMEs is seen as critical for boosting employment, supporting rural incomes, and ensuring more inclusive economic growth. The latest regulatory easing reflects Bangladesh Bank’s effort to align banking sector incentives with national development priorities.

Key Changes in Loan Provisioning Rules

The central bank expects that this policy adjustment, combined with existing credit targets, will play a vital role in reviving lending momentum in sectors that are central to job creation and sustainable economic growth.