Dechen Dolkar

The National Council’s (NC) Economic Affairs Committee has recommended review of Bhutan’s interest rate policies to improve access to rural credit.

The chairperson of the Committee, Tshewang Rinchen, presented the report on rural credit access to the NC yesterday.

Rural credit increased to Nu 2,270.20 million in 2021, followed by sharp declines in 2023 and 2024 to Nu 797.18 million and 3736.56 million, respectively, potentially due to shifting priorities or economic constraints.

During the presentation, Tshewang Rinchen mentioned a common perception among rural residents that high loan interest rates significantly hindered access to credit.

“The loans are expensive for financially constrained rural people, limiting their ability to borrow. This, in turn, impedes investments in agriculture and small businesses in rural areas,” he said.

The Committee recommended the government to review and adjust interest rate policies to ensure fairness and affordability for borrowers, taking into account factors such as inflation, market conditions, and the socioeconomic status of loan applicants.

Currently, the Royal Monetary Authority has set the Minimum Lending Rate at 6.8 percent, while term deposit rates range from 2 percent to 9.1 percent, and savings deposit rates range from 4.5 percent to 5.6 percent.

Tshewang Rinchen said that that the government should look at exploring strategies to lower interest rates, such as injecting liquidity or funds into banks. He said that Bhutan had the highest interest rates among South Asian countries. Bumthang MP Kencho Tshering said that some microfinance institutions charged interest rates as high as 24 percent and suggested that interest rates should be fixed in consultation with the central bank.

“Farmers, when in need, will borrow money even if the interest rate is high,” he said.

Tshewang Rinchen presented constraints faced by lending institutions, such as challenges in assessing borrowers’ creditworthiness and exposure to agricultural credit risks, compounded by inadequate insurance coverage. Borrowers, on the other hand, face challenges such as high-interest rates, limited financial literacy, and cumbersome documentation processes. Key deterrents include stringent collateral requirements and valuation challenges.

The Committee recommended simplifying and expediting the loan application and documentation processes, particularly for residents in remote areas, to reduce costs and bureaucratic hurdles.

Tshewang Rinchen emphasised the need to revisit and streamline the current documentation requirements for loan applications.

Currently, the complex documentation process is a major barrier to rural credit access. Tshewang Rinchen noted that requiring individuals to physically visit banks, often located far from rural areas, is time-consuming and costly.

He said that the documentation process itself was complex and confusing for rural farmers with limited literacy. The need to travel to banks for documentation incurs transportation expenses and potential wage losses, discouraging low-income farmers from seeking loans even when they have genuine financial needs.

“This lengthy process also causes delays in loan disbursement, depriving borrowers of timely access to funds for urgent needs such as seasonal cropping,” he said.

Trashigang MP Sonam Tobgyel said that earlier, local government leaders verified loan documents, but now banks have taken over this role, making the process longer and more cumbersome for farmers.

He said that if one family member applies for a loan, all family members are required to visit the bank, with some cases even requiring patients to make the trip. “This is very expensive for farmers.”

He also said that banks required a minimum of five acres of land as collateral for rural credit, despite no such requirement being stipulated in policy. “This condition restricts families from further financial opportunities as their land remains mortgaged.”

Tshewang Rinchen further highlighted the impact of the Property Tax Act of Bhutan 2022, which has increased property and land taxes for rural residents. Since land often serves as collateral for loans, rural farmers expect financial institutions to adjust loan amounts in consideration of rising land values.

Stringent collateral requirements imposed by banks make it difficult for small and marginal farmers to qualify for loans, further limiting their access to credit.

Tshewang Rinchen also said that the implementation of the Property Tax Act of Bhutan 2022 resulted in increased property and land taxes for rural residents. Land is a significant asset for rural residents, often serving as collateral for loans.

“Rural farmers expect financial institutions to adjust their loan amounts by considering the increase in land values,” said Tshewang Rinchen.

To address these challenges, the Committee proposed several measures, including revising loan ceilings, strengthening financial education, introducing rural-focused source assessments, reducing loan disbursement turnaround times, offering concessions for education loans, and ensuring an adequate supply of rural credit.

NC will continue deliberating on the recommendations proposed by the Economic Affairs Committee on November 27, 2024.