Of opportunities and risks

Talk to anybody in the private sector or to any aspiring entrepreneur and he or she will say lack of access to finance is the biggest hurdle in translating ideas into businesses. There are credit facilities available, but it is restricted by the need to have collateral in the form or land or property. Most, especially starters, do not have this.

It is said that access to credit is skewed toward the already rich as the collateral condition often disqualifies even the most brilliant business idea. There is an opportunity, for once, to get to a level-playing field with the government launching the National Credit Guarantee Scheme to ease access to credit and sustain investment.

Under the scheme, the government will stand guarantor for a portion of the loans those in the private sector, including farmers availed. Small and cottage category will only have to require a 10 percent equity while medium and large scale categories would receive loan financing support up to 50 percent (see story on pg1).

The scheme is a big and a bold step in helping the private sector, creating jobs and boosting export. It will also help young entrepreneurs and start ups in kick-starting their ventures and provide livelihood support to the thousands of Bhutanese displaced by the pandemic.

The government is also taking a huge risk as a guarantor for an investment that is in the billions. It urged the private sector to grab the opportunity with responsibility.

There should not be a pessimistic outlook to such a good initiative, but we have reasons to be.

The Governor of the Central Bank, at the launch, subtly warned of the risk of such schemes and urged banks to be diligent when approving loans. There will be committees set up to ensure the loans are not misused, but we know how it works.

Borrowers will make best use of the opportunity, but it is not sure how responsible they would be. Bad loans and unpaid debt is a major problem today in our society. The biggest problem among the financial institutions is the non-performing loans to the extent that the value of seized properties are not worth covering the loans.

There are plenty of tricks up the sleeves. Both lenders and borrowers know them well.  Banks cannot recover their loan at open auctions after seizing, for instance a truck, if they had lent Nu 4M through manipulations when loan restrictions say that the 50 percent approved loan to buy the truck is Nu 2M.

Government-guaranteed credit schemes is the norm today as countries try to weather the impact on the economy from Covid-19. The priority, from Australia to Kenya to India and Indonesia is on access to credit or rationalisation of the cost of credit. It is needed in a Covid-19 affected economy, which battered the private and informal sector.

However, what we need are safeguards. We need greater awareness of the risks and we need the sense of responsibility to make the best use of such facilities.

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