Report: While the private sector is citing access to finance as a constraint to growth, banks are forced to rely on collateral rather than cash flow because only about half of the commercial firms in Bhutan prepare certified financial statements.

This is one of the Asian Development Bank’s (ADB) findings based on a survey conducted by the World Bank.

In an assessment of financial sector development carried out by ADB, it was revealed that banks cannot seize collateral in a timely manner when borrowers default because of an inefficient judicial system that favours the borrowers at the expense of creditors.

For instance, when borrowers fail to appear at judicial proceedings, the court doesn’t take action; instead, it postpones the case, stretching out the foreclosure process into years. There were also instances when borrowers complained to the Human Rights Commission, which then imposes sanctions on the lender from publishing the names.

“This forces lenders to reduce the availability of credit to all but the most trustworthy borrowers, which undoubtedly has negative effects on economic growth,” the report states. “There is no comprehensive list of related parties to protect lenders.”

Delinquent borrowers also attempt to deceive the credit registry by applying for new credit in the name of their spouse, child, or other family member.

While the Removable Property Act, gives a lender the right to seize collateral underlying a delinquent loan, but the Act also requires the lender to get permission from the borrower and such permissions are rarely granted.

Lenders also complained about the scarcity of judges who know and understand corporate law, it is stated in the report. Lenders have to register their complaint as a civil case, which gives the borrower six months to respond.

Car loans, as stated in the report, have proved problematic because borrowers sometimes sell their car to a third party without notifying the lender.

The ADB has recommended that Parliament should pass legislation to improve judicial efficiency. It should mandate that the credit bureau develop a comprehensive list of related parties to protect lenders from delinquent borrowers who seek additional funds in the names of family members or related parties. The Parliament also should amend the Removable Property Act to eliminate the requirement of permission from a borrower to seize collateral, it states.

With regard to crisis management, the report stated that the Royal Monetary Authority (RMA) should develop policies for crisis management to deal with the possibility of a bank failure. This may involve changes to the Bankruptcy Act,  in order to deal with a financial institution. The government needs to plan for implementation of a scheme for deposit insurance to support confidence of retail depositors in the event of a crisis.

The study also highlighted that credit is not only concentrated for housing and personal use but also geographic concentration of exposures are building up in Paro and Thimphu. “The RMA should consider incorporating geographic shocks, such as a housing crisis in those metropolitan areas,” the report states.

Tshering Dorji