Private sector’s funding problems

Local banks are neither willing nor able and foreign ones aren’t too eager either

Finance: Private sector is asking for right intervention from the government so that it can play a role in building a healthy economy.

Asian Development Bank’s (ADB) assessment reveals that over 30 percent of the private small and medium firms consider lack of access to finance as their greatest constraint to business development.

The study also reveals that local banks do not have diverse sources of funding and tend to rely heavily on deposits.

For banks to make profit, the interest on credit has to be higher than the interest it pays on the deposits.  Bankers agree that local banks have limited sources and they has made credit available to the private sector based on the feasibility of projects.

Mukesh Dave, Druk PNB’s chief executive officer, said the banks are willing to lend when there is excess cash, provided the returns are assured.

However, findings from the Bhutan Chamber of Commerce and Industry (BCCI) reveals that only 6.4 percent of the total credit from the financial institutions was made available for private sector.

“Look at the financing portion. How the private sector is expected to grow without alternate funding source?” questioned Phub Tshering, secretary general of BCCI.

Mukesh Dave said that if private sectors took up big hydropower projects, local banks were not in a position to finance unless all the banks agrees on consortium financing.

Representatives from the private sector said that the procedure and collateral requirements are unreasonable to start up medium or small business.

The economic development policy allows external commercial borrowing for the private sector, meaning that a private firm can borrow from foreign banks.

Phub Tshering said that several private firms were interested to borrow from foreign banks, but this requires sovereign guarantee, which the government does not provide.

Sovereign guarantee is a government’s guarantee that an obligation will be satisfied if the primary obligator defaults.

Findings from the ADB also mentioned that, even as international banks consider providing finance to Bhutan, lack of adequate currency hedging becomes a key concern.

Currency hedging is a method used by companies to eliminate their foreign exchange risk resulting from transactions in foreign currencies.

So, the only option is to bringing in the foreign investment.  Even with changes in FDI policy, the country still has to offer a conducive environment and competitive edge, said Phub Tshering.

When the country is in difficult economic situation, financing is an obvious problem, he added.

BCCI has studied why there aren’t many proposals for production and manufacturing firms, which would enhance exports and substitute imports.

Domestic industries become incompetent because of high production cost, resulting from lesser privilege it gets, said Phub Tshering.

What private sector needs is a clear short, medium and long-term road map and direction.

“Targets have to be set considering the revenue and resources available because there are many critical things affecting the growth,” said Phub Tshering.

The ADB’s assessment on the private sector says that enhancing access to finance should be a pillar of government policy to foster private sector development, employment growth and diversification.

Transparent access to finance for businesses, especially for small and medium enterprises (SME), is one of the key pillars in the draft private sector development strategy that the government is currently considering.

According to BCCI’s findings, private enterprises in the country are hampered by insufficient access to long-term finance.

“Such under-funding has led to significant underinvestment, particularly in capital goods such as machinery and equipment, as well as in research and development,” says the BCCI report. As a result, this has contributed to low level of innovation and productivity in the sector.

ADB points to the inadequate transport infrastructure that slacked the private sector development.  Access to international markets is also complicated by the fact that goods have to go through neighboring countries, which increases transport cost.

Higher labour cost and inadequate skills are also one of the major factors that affect Bhutan’s competitiveness.

Private sector provides employment to more than 70,000 people, which is 24 percent of the currently employed.

By Tshering Dorji

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