The govt. will ensure collateral-free loans at four percent interest irrespective of BOiC’s fate

Finance: Even as a task force looks into the possibility of merging the controversial Business Information and Opportunity Centre (BOiC) with Bhutan Development Bank Limited (BDBL), more questions are rising on its legality, functioning and government’s decisions.

First on the list is, will BDBL provide loan at four percent interest rate? This is because once merged, the BOiC, a special purpose vehicle formed to stimulate the economy falls under the purview of a financial institution, just like a commercial bank.

However, the economic affairs minister, Norbu Wangchuk said that the government will ensure that BOiC loans would be collateral free and given at four percent interest irrespective of the situations that may arise.

“But how it will be done is something that the we must wait for,” he said. The ultimate aim, he said, should be to promote small, medium and cottage industries.

Lyonpo said merging with BDBL is just one of the options of the many explored. He said the government is weighing the option in order to protect the government’s interest of having minimum interest rate, promoting the rural economy and  small industries.

Opposition party member, Kinga Tshering said should the merger happen, BOiC would have to abide by the RMA rules. This may result in increasing the interest rates.

Lending rates of financial institutions in the country is guided by the RMA guidelines on base rate system. The base rate is the minimum rate below which it is not viable for institutions to lend in the domestic market.  It is introduced to prevent undercutting in interest rates due to competition and overcharging customers.

BDBL’s lending rate for agriculture and livestock activities ranges from 11.73 percent to 12.23 percent, while it charges between 11.73 percent and 13.13 percent per annum for manufacturing.

Gasa’s Council member, Sangay Khandu said the same bank couldn’t have two lending rates for one product. He said BDBL is subsidised by the government to improve rural economy, and if it is to lend the economic stimulus fund of Nu 1.9B at four percent, BDBL’s other products may suffer.

An experienced banker is of the view that BOiC is a special purpose vehicle to stimulate the economy and thus lower lending rates. “But the RMA is the competent authority to exempt the base rate on certain sectors and merging is not that easy, it may require some amendments in rules also,” he said.

He said if the stimulus fund were to enjoy the same lending rate with BDBL, then its rate on other loans also should fall and this would affect the entire financial institutions and the economy in turn. “If the lending rate of the stimulus package is increased, then the sole purpose of micro-financing of the rural enterprise through a special purpose vehicle at low interest is defeated.”

As per RMA guidelines, the base rate system, however, will not be applicable to loans for agriculture sector, small businesses and artisan schemes, staff incentive loan and loans against fixed deposits.

But BDBL is already charging 11 to 13 percent per annum for agriculture and manufacturing sectors and this is derived from their cost of deposit and risk premium. So lending at four percent may not be viable for a financial institution but its risks are cushioned if it is a special purpose vehicle.

For a development bank that is already subsidised by the government, another banker said, taking over BOiC would mean more subsidy and foregoing more revenue.

In a span of six months this year, BOiC spent about Nu 14.1M in operation, business development and branding. Of this, around Nu 8M was for salary and wages.

The income from interest (both small industries and non-formal rural activities) was only Nu 989,502, incurring a loss of more than Nu 13M, as of June 30.

A Kuensel source said there was some tussle between the two institutions from the very beginning.

Should the merger take place, will BDBL inherit the losses suffered?

Legality issue still prevails

Even if the government decides to merge BOiC with BDBL, the question of legality still remains unrequited.

Gasa council member, Sangay Khandu said the National Council’s intent was not to close BOiC, but questioned the legal compliance.

“I am sure the government may have studied this and come up with a suitable decision,” said Kinga Tshering.

But the opposition party, he said is happy that the government finally heeded to their call of merging BOiC with BDBL. Kinga Tshering said this call for merger was made from the second session of the Parliament considering that BDBL has branches in all the gewogs and service delivery would be efficient.

However, Lyonpo Norbu Wangchuk said that the government still believes that establishment of BOiC is legal. “Because in democracy government does not have the power to decide on things arbitrarily,” he said adding views and concerns raised by different groups are being considered.

“But the government will address the legality issue,” he said.

Did the economy stimulate?

When Nu 5B of the ESP fund, almost five percent of the GDP, is injected into the economy, it should directly translate into five percent GDP growth, according to opposition party members.

The opposition member, Kinga Tshering said this should happen immediately and the economy has to be stimulated. He said this injection should also translate into growth of small and medium enterprises.

Records with BOiC show that of the 4,181 business proposals registered and attended, 1,309 were approved and 1,852 pending as of June 30, this year.

A National Council representative said many MPs were questioned on the service delivery of BOiC while visiting the constituencies.

But there are success stories of BOiC beneficiaries.  From vegetable farms to poultry and small businesses, there are people who said they have benefited from the Centre.

The Centre also created about 2,025 jobs and promoted the entrepreneurial skills through its training programmes. It has self-employed 1,309 individuals and created 716 more jobs.

Tshering Dorji