… at special interest rate and no requirement of collateral and guarantor

Micro financial institutions like Loden Foundation and Rural Enterprise Development Corporation have been key sources of finance for entrepreneurs and farmers because loans provided by commercial banks are un-affordable.

But this could change with the launch of priority sector lending (PSL) policy next month. The PSL will be implemented from January 1 next year.

During the Global Entrepreneurship Week, the governor of Royal Monetary Authority,Dasho Penjore, said youth and farmers should enjoy equal access to finance whether they avail loans from commercial banks or micro finance institutes.

Based on the targets set for the financial institutions in 2018, it is estimated that PSL will inject a total of Nu 1.5B capital in cottage and small industries(CSI)sector (Nu 530M for primary agriculture and livestock production and Nu 950M for non-agriculture CSI). This will be achieved if every bank increases their lending in the agriculture and CSI by one percent.

The PSL will facilitate commercial banks in country to provide collateral-free loan for CSI. Interest rates would also be slashed and there would be no requirement for a guarantor.

“The RMA Act gives central bank the authority to come up with preferential lending rate lower than the market price,” the governor said. This means the interest rates would be lower than the minimum lending rate.

For Banks to avail of fiscal incentives, the PSL has ensured that interest on loan towards agriculture to be used for primary production below 8 percent. For the cottage and small industries, interest would be capped at 8.5 percent. However, the maximum loan ceiling is Nu 500,000 for farmers, Nu 10M for cooperatives and groups, and Nu 10M for companies.

The fiscal incentive Act has granted tax holiday for the banks on their interest income earned from lending towards CSI.

Currently, Bhutan Development Bank Limited (BDBL) holds the highest loan portfolio in agriculture sector. The bank charges an interest of about 10 percent.

“BDBL might have to now lower its interest. If not, it will miss the fiscal incentives and clients will go to other banks,” Dasho Penjore said.

He added that from a total domestic loan of about Nu 97B, agriculture sector holds only five percent of the share. This is largely because of the BDBL loan. Agriculture sector constitutes less than one percent of the total portfolio for other banks.

Despite this, he said, production is not increasing because the loan is misused. “People buy boleros, construct houses, and do other things from the agriculture loan,” he said.

The PSL will make the banks move away from traditional lending norms where collateral and guarantor is a prerequisite. To this effect, insurance-based lending scheme will be introduced, where insurance companies will cover the risk.

“We have discussed with the insurance companies and requested them to provide affordable premium,” he said. “Insurance companies will be the third eye to monitor and ensure that loans are not misused.”

However, loan default will be the biggest challenge because currently tolerable level of non-performing loan (NPL) ratio is between six to seven percent. REDCL’s NPL ratio has already reached 27 percent.

“Our greatest fear is willful defaulters and insurance schemes will not cover such moral hazards,” Dasho Penjore said. “We have to be responsible borrowers. There will be some crooks, but we will come after them,” he said, adding that the credit information bureau will punish the defaulters.

To make the PSL more practical, a special window service will be opened in all banks so that people can avail loans from any bank and its branches. A PSL Council will be chaired by RMA and the policy would be reviewed every six months.

Dzongkhag officials, local leaders, and dzongdags would be made responsible to approve the proposal and then forward it to the banks for further approval. To enhance efficiency, training has already begun.  Officials from gewogs, dzongkhags, and banks would be trained. The RMA has compiled a list of potential opportunities in the two sectors with the help of cottage and small industries department and agriculture ministry.

“We have to revolutionise our farming system. Subsistence farming is not going to work,” the governor said.

The need of the hour, he, said “is enterprise farming” and that requires capital.

The PSL, he added, will touch on the lives of people from the farms to all those involved in the value chain unlike the minimum lending rate policy, which benefited only borrowers with capacity, from the reduced interest.

While interest-free loans provided by some institutions will be attractive, he said that access is more important. PSL is expected to ensure this.

Tshering Dorji