TDS Desk:

Economic stagnation, high inflation, and rising interest rates typically hit a nation’s small and micro–entrepreneurs the hardest. By that logic, they should be the ones more likely to default on loans in such situations. Data from Bangladesh’s central bank, however, shows the opposite. Statistics indicate that just 16 percent of bank loans under BDT 10 million are classed as non–performing. By contrast, nearly half of all loans above BDT 500 million have fallen into default.

Bangladesh Bank recently published a report detailing this inverse relationship between loan size and default rates. Titled “Banking Sector Update,” the report shows how larger borrowers have fostered a culture of non–repayment. Overall, non–performing loans accounted for 34.6 percent of total credit disbursed by the banking sector as of last June. Default rate for small loans under BDT 10 million was less than half that level, at 16 percent. For loans between BDT 10 million and BDT 100 million, rate rises to 26.1 percent. It then jumps to 45.7 percent for credit in the BDT 100 million to BDT 200 million bracket. For loans ranging from BDT 200 to BDT 300, the default rate is 38 percent.

Defaults on loans between BDT 300 million and BDT 400 million reached 42.1 percent, according to the central bank. The rate is higher in the BDT 400 million to BDT 500 million range, at 45.7 percent. Worst performance is at the top end: loans above BDT 500 million, where 48.2 percent are now in default. That puts default rate for large loans nearly 14 percentage points above sector–wide average.

Bank executives and analysts say small entrepreneurs repay their bank debts with consistency, while large borrowers have institutionalised non–repayment. During the now–ousted Awami League government’s fifteen–year rule, more than half of the country’s banks saw funds siphoned off in the guise of loans through collusion between boards and management. Following the 2024 mass uprising, many business figures identified as bank looters fled the country, though some were arrested and jailed. Experts cite this as a reason why larger loans have higher default rates. Small entrepreneurs, by contrast, continue to service their debts despite economic stagnation, high inflation, and higher interest rates.

Leading the sector in loans to cottage, micro, small and medium enterprises (CMSMEs), BRAC Bank PLC keeps non–performing loan ratio below two and a half percent. Its managing director and chief executive officer, Tareq Refat Ullah Khan, said default rate on smaller loans is below one percent. Speaking to journalists, he said, “Fifty percent of BRAC Bank’s loan portfolio is in the CMSME sector, nearly half of which is extended to very small businesses. Our recovery rate from these small businesses is the highest. If the right borrower is selected for a small loan, there should be no defaults. We have observed that entrepreneurs in this category are highly motivated to repay bank loans.”

But reaching micro and small entrepreneurs is not easy. The senior executive said success depends on nationwide network and physical presence. He added, “To succeed in this sector, a nationwide network and physical presence are essential. Close supervision of business loans is critical to ensure that invested funds are used appropriately. To manage this, we have around 10,200 permanent employees, with more than 3,500 additional people working with us. A large portion of this workforce is engaged in the SME sector. Although this results in a comparatively high cost–to–income ratio, it forms the foundation of BRAC Bank’s success. While many were initially cautious about investing in this sector, efficiency will improve over time and costs will decline. Only then will the model become profitable.”

City Bank PLC launched an even smaller–scale product than conventional CMSME loans in late 2021. The collateral–free product was dubbed as “Digital Nano Loan”. Available through bKash app without separate documentation, it allows customers to borrow between BDT 500 and BDT 50,000 instantly with a few taps. This loan is then to be paid back within three months.

“This nano loan programme has been a major success,” said City Bank’s managing director and chief executive officer, Mashrur Arefin. “So far, digital nano loans worth BDT 57 billion have been disbursed, with an average loan size of just BDT 4,000. More than 25,000 customers use this service daily, and each customer has, on average, taken out the loan more than seven times. The average loan portfolio over the past three months was BDT 4.5 billion and it rose to BDT 5.5 billion this month. Currently, 8 million customers are eligible for these loans, and 2.1 million have benefited so far. With timely repayments, the current outstanding balance of nano loans stands at only BDT 7.1 billion. The product has gained popularity among women as well as men. The default rate on these ultra-small loans is just 0.7 percent.”

Amid broader banking–sector distress, City Bank is in its strongest position to date. Its managing director attributes this to a right client selection process and good governance. “We maintained corporate governance through the sector’s turmoil over past decade and a half,” he said. “Lending to right customers has kept NPL ratio under control. Rather than focusing on large clients, we are currently giving greater priority to the CMSME and retail sectors in lending.”

Non–performing loans in the country’s banking sector have worsened further since last June. Central bank data shows that by end of September last year, total disbursed loan stock stood at BDT 18.03 trillion. Of that amount, BDT 6.44 trillion was classified as defaulted. This puts 35.73 percent of all disbursed bank credit in the non–performing category. Such a default rate is now the highest in world — exceeding even Ukraine, a country battered by war for nearly four years. Europe’s second–largest country has been at war with Russia since February 2022 yet reports an NPL ratio of 26 percent.

A review of data from central banks of several countries and leading research institutions confirms Bangladesh now has the world’s highest NPL ratio. No other country records a default rate above 30 percent. Even nations enduring prolonged war, high inflation, and recession all post figures far below Bangladesh’s. Lebanon, ravaged by conflict with Israel, reports an NPL ratio below 24 percent. Russia, at war in Ukraine for nearly four years, posts a default rate of 5.51 percent, despite a history of elevated NPLs linked to oligarchic control.

Greece, a country which defaulted a decade ago, now has an NPL ratio of 3.6 percent. Argentine banks, coping with hyperinflation and a historic collapse of local currency, have cut bad loans to 1.6 percent, down from more than 20 percent at the start of the century.

Bangladesh’s NPL ratio also exceeds that of every other South Asian country. In the region, only Sri Lanka posts a double–digit bad loan ratio despite the island nation declaring bankruptcy three years ago amid acute economic and political crisis. Over the past three years, a credible election has restored political stability and brought relative economic calm in Sri Lanka where the NPL ratio is now at 12.6 percent.

Pakistan, another country that has endured severe economic and political instability, though not to Sri Lanka’s extent, reports a bank NPL ratio of 7.4 percent. Neighbouring India’s banking sector posts a default rate of 2.3 percent, while Nepal’s stands at 4.4 percent.

Commenting on the situation, central bank spokesperson and executive director Arif Hossain Khan told journalists that banks had long swept bad loans “under the carpet”. He further said, “Loans given to influential individuals through irregularities or corruption were not shown as defaults. But over the past year, these hidden non–performing loans have come to light. The central bank’s effort was to reveal the reality of the banks. Now we have a clear understanding of that reality.”

The central bank spokesperson added, “The country’s genuine entrepreneurs and businesspeople always repay their bank loans, with CMSME-sector entrepreneurs leading the way. For several years, we have been urging an increase in lending to small and micro enterprises. Despite limited impact initially, loan disbursement in this sector has risen since last year. We hope that in the coming years, the CMSME sector will play an even greater role in the national economy.”

A review of Bangladesh Bank data shows the largest share of bank credit is concentrated in industrial and business sectors, which also account for the bulk of defaults. By the end of June 2025, the business and trade sector ranked second in terms of total loan disbursed — at 33.2 percent. Yet it topped the list in terms of defaulted loans — at 44.7 percent. The single largest borrowing sector in the country is industry, accounting for 42 percent of total loans. It also has the second–highest default rate at 35.9 percent.

Agriculture, fisheries, and forestry together account for just 4.3 percent of the total disbursed loans, yet their default rate stood at 31.6 percent as of June last year. Construction takes 7 percent of total credit and has an NPL ratio of 27.7 percent. Consumer loans, which make up 10 percent of portfolios, carry a 9.4 percent default rate. Lending to the transport sector is marginal — at 0.6 percent of total credit — but the sector shows an NPL ratio of 22.7 percent. Other institutional and miscellaneous loans, together accounting for about 3 percent of disbursements, post default rates of 12 percent and 11.3 percent.

While small borrowers contribute far less to the bad loans stock, they face the steepest barriers to accessing credit. Persistent complaints suggest documentation requirements and strict rule enforcement fall disproportionately on small applicants, often shutting them out of the needed funds.

On this point, Anwar Hossain Chowdhury, managing director of SME Foundation, told journalists: “Loan recovery rates for SME entrepreneurs stand at 98–99 percent. Yet doubts are often raised whether they can provide collateral or repay loans. For marginal entrepreneurs, the lack of just BDT 500,000 to BDT 1 million in credit can halt their business operations. Banks and financial institutions have grown accustomed to catering to the already affluent.”

He further said, “There are directives from the Bangladesh Bank for collateral–free loans of up to BDT 500,000 for women entrepreneurs. But many branch–level officials are unaware of this. In other cases, officials are aware but feign ignorance. Large loans are taken by relatively few borrowers; by contrast, small–loan recipients are far more numerous. SMEs account for 98 percent of total industries in the country and 85 percent of industrial employment. According to a BBS survey, there are 11.8 million SME units in Bangladesh, employing 30.7 million people. Yet, banks and financial institutions are most reluctant when it comes to lending to the SME sector.”