Yangyel Lhaden

Most borrowers can’t get loans from financial institutions and are turned away for lack of sufficient net income for repayment, a study by the Royal Monetary Authority shows.

More than 75 percent of the 5.3 percent of adults with bank accounts, who were denied loans, was not given loans because they lacked sufficient income to repay them. The other applicants were denied loans because of non-acceptance of collateral (17.7 percent), inability to produce required documents (17 percent), and insufficient collateral (14.2 percent).

They sought loans from informal sectors, because of these reasons, according to the Royal Monetary Authority’s 2022 survey released last year.

The survey covered 7,200 households across 20 districts, estimating the adult population at 448,865, with 57.1 percent females and 42.9 percent males. Approximately 80.8 percent of adults have bank accounts, with 45.1 percent availing loans from both formal and informal sectors, comprising about 13.5 percent of the banked adults, as per the survey.

Many said that the situation remains the same if not worsened.

“I went to a financial institution to avail a housing loan, expecting to get a credit of Nu 9 million (M) since my collateral’s market value is Nu 9M,” said a private employee. “The bank offered to give me about Nu 3M since, in their valuation, my property’s worth is about Nu 3M.”

He said that he sought the loan because he was confident in his ability to repay it, because he would be more worried than the bank about the possibility of his property being seized if he defaulted on loan repayment.

“The bank only cares about equated monthly instalments and not return on investment,” he said.

The private employee then sought to avail the remaining amount from a private money lender.

The survey reveals significant challenges faced by banks in their pursuit of financial inclusion among both banked and unbanked populations. It suggests that while some banked adults may not meet formal financial institutions’ criteria, there is a potential willingness to avail of loans if viable options are communicated clearly. This emphasises the importance of financial institutions providing transparent information about loan requirements and exploring alternative options to enhance credit accessibility across different population segments, the survey report states.

The survey report also states that simplifying documentation requirements could play a pivotal role in addressing these challenges and fostering greater financial inclusion. “None of the banked adults whose loans were refused cited reasons such as “no collateral,” “being a guarantor to a default loan,” or “banks refusing without justification” as the reasons for loan refusal, although such situations may occur.”

Another private employee said that it was increasingly difficult for them to avail of loans from formal financial institutions because the banks require a guarantor for private employees from corporate or civil servants. “ I couldn’t avail of a loan because I couldn’t get a guarantor and borrowed from my colleagues.”

A corporate employee who is moving abroad went to a bank to avail of a loan. Despite having collateral, he was asked for a guarantor. “The bank was only willing to offer me about 30 percent of the worth of my collateral, which also required a guarantor,” he said. “My property is immovable, and even if I am unable to pay back on time, they could seize my property.” He did not avail of the loan from the bank, and instead, his friends lent him the money.

Although people find it difficult to avail loans from formal financial institutions, the majority of those who do avail loans do so from banks. Bhutan Development Bank Limited provided the highest percentage of loans, at 59.5 percent, followed by Bank of Bhutan at 19.2 percent, and Bhutan National Bank at 9.4 percent.

Among formal financial institutions, those providing the least loans include Tashi Bank, Royal Insurance Corporation of Bhutan, Druk Punjab National Bank, and Bhutan Insurance Limited, with percentages of 2.5 percent, 2 percent, 1.1 percent, and 0.7 percent, respectively.

A civil servant, Deki Wangmo, said that even for civil servants, there are numerous prerequisites to fulfil to avail of a loan, such as determining one’s basic salary to establish the loan ceiling, requiring a guarantor who is equal to or senior in position, and considering one’s provident fund. “For smaller amounts, it is better to borrow money from friends and family.”

According to the survey, 6.5 percent of loan borrowers received loans from friends and family, and 0.3 percent from registered and unregistered money lenders.

The survey also reveals a high loan default rate, with about 24 percent of loan recipients unable to repay their loan instalments. Loan default rates are significantly higher in rural areas, at 27.4 percent, compared to 17 percent in urban areas.