Thukten Zangpo
The government’s Economic Stimulus Plan (ESP), particularly low-interest loans disbursed through the financial institutions (FI), is heavily mired in red-tape, cumbersome process, documentation hassles, and reluctance of FIs to lend.
Launched just two months ago, the ESP has injected Nu 5.3 billion into the financial institutions to revitalise and speed up economic recovery post-pandemic. However, in wake of the significant barriers, businesses and individuals across the country are facing major challenges in accessing the much-needed ESP loans.
As of October 8, only 12 projects were approved out of 193 applicants received by the FIs, with Nu 8.3 million disbursed. Remaining applications are being assessed by the FIs.
Key challenges include stringent eligibility criteria, extensive documentation requirements, accessibility issues in rural communities, and a reluctance among FIs to participate due to perceived risks.
Kuensel learnt that some FIs are in fact reluctant to participate in the ESP loans because of the huge risk involved.
Some observers say that the government rushed the launch of ESP, banking on the FIs to deliver the ESP, without a clear implementation strategy.
The ESP consists of two funding windows: Nu 3.3 billion allocated for concessional credit lines (Window I) and Nu 2 billion designated as a reinvigoration fund (Window II).
However, applicants have reported that the loan application process is cumbersome. One applicant described it as “not easy”, citing lengthy documentation as a major hurdle.
To apply for ESP loans under the Window I, sectoral clearance from relevant authority, either the dzongkhag or the ministries, is mandatory. While the approval under the agriculture and livestock sector is relatively straightforward, other sectors face challenges.
Loans under Window I are offered at 4 percent interest rate without collateral for agriculture and livestock and production and manufacturing (small and medium) up to Nu 1 million to Nu 100 million.
An applicant said that his friend wanted to apply for loans for the sculpture business, however, the official from the Ministry of Home Affairs was not aware of the clearance.
Similarly, individuals in dzongkhags applying for loans for information and technology businesses were unsure whether they needed to travel to Thimphu for clearance.
Existing businesses, particularly cottage and small industries (CSIs), require additional documentation for the loan process, including proposals, audit clearances, and company valuations.
An entrepreneur said that many CSIs lack knowledge of standard company valuation forms and certified valuation companies. “The collection of these documents can take weeks or even a month.”
As of October 8, there were no applications from existing startups for scale up funds, apart from a few enquiries about the loans.
A start-up entrepreneur said that many startups and CSI companies with high growth potential were not able to scale up due to lack of scale up financing systems in the country and the requirement of collateral to raise debt financing. “The delay in raising capital has severely impacted the businesses with many now under non-performing loans (NPL). Our only hope was the ESP,” the entrepreneur said.
The entrepreneur added that even if businesses with NPL clear their pending dues with the bank, they face the mandatory 3-6 months cooling period before they can access new loans. “This makes it impossible for these businesses to take advantage of the ESP within December.”
An entrepreneur said that the only other option for these businesses is to apply under the reinvigorating Window II. “Businesses with NPL can apply for interest subsidies which will help them to reduce their equated monthly installment (EMI). The additional fund option under this window requires collateral.”
The entrepreneur added that the access to finance and high cost of finance has been one of the biggest factors affecting the entrepreneur and startup ecosystem in the country. “The current ESP programme fails to address these issues leaving a lot of entrepreneurs in a catch-22 situation. Interest reduction can only help if businesses have access to capital that will help them revive and grow.”
One entrepreneur said that FIs have deliberately made the checklist complicated to ensure that only few get the loans, given the risks the FIs have to bear. “People at the grassroots would not be able to apply for the loans because of the cumbersome documentation process, let alone access the loans.”
He recommended simplifying the loan process and initiating a one-stop centre to provide all sectoral clearances.
As a result, numerous consultancy firms are emerging to provide documentation services for ESP loans, charging between Nu 50,000 and Nu 60,000 per application.
What the banks say?
Under the concessional credit lines, FIs are given the authority and ownership to sanction collateral-free loans at 4 percent interest rate. The gestation period for the loan is a maximum of two years, which means borrowers will have to repay after two years.
A banker said that the FIs must repay the funds to the government within five years, starting from June 2029. “In any case, the project will not be completed within this timeframe, including two years of gestation period. So, all the responsibility falls on the banks,” he said.
He said that the EMI will be substantial due to the high project costs over the five-year period. “We must be cautious when accepting applications and evaluating projects, which is why we have stringent rules in place,” the banker said. “These guidelines and documentation requirements were developed following consultations with all FIs and the central bank.”
On the reinvigoration fund, a banker said that banks anticipate applications to come in around mid-November, as applicants’ turnaround plans are still under process.
According to the banks, loans under Window I for agriculture and livestock would be processed within one week while those for production and manufacturing would take about one month. Reinvigoration fund applications are also expected to be processed within a month.
What the government say?
Prime Minister Tshering Tobgay recently announced plans to review the risk-sharing mechanism between the government and FIs, acknowledging the challenges posed by the ESP’s 100 percent risk transfer to the banks.
Lyonchhen said that the government will bear the costs for additional recruitment of human resources to provide service for the ESP loans for the next five years, including the Bhutan Development Bank Limited which has the expertise in rural banking.
The government also plans to train the community centre operators on the ESP loan process.
During the presentation on the implementation status of ESP by the ESP Secretariat to the Members of Parliament (MP) on October 16, MPs raised concerns over technical clearance, inadequate communication between the public and the government regarding ESP plans, and limited bank accessibility.
The MPs urged for enhanced government support, especially for the tourism and hotel industries affected by the pandemic. In addition, they recommended customising loan forms in both Dzongkha and English to better meet public needs.