RMA tightens vehicle loan

In the wake of increasing vehicle import and associated impact on the economy and the environment, the Royal Monetary Authority (RMA) has tightened access to credit for purchase of vehicles.

The central bank on August 1 issued a circular to all financial institutions informing them about the loan to value ratio on motor vehicle or transport loan being revised from 50 percent to 30 percent with immediate effect.

This means that financial institutions will only provide 30 percent of the vehicle cost as loan and the loan applicant will have to inject the remaining 70 percent as equity.

RMA governor Dasho Penjore said that the board decided to change this clause of the guideline on motor vehicle loan because of the huge surge in vehicle import and corresponding increase in import of fuel and spare parts besides the traffic congestion.

He added that the application of GST in India would exempt duties on import of cars to Bhutan. This would reduce the cost of Indian made cars by upto 20 percent. “This may increase the car imports to Bhutan, further worsening our INR reserve and trade deficit,” he said.

“Considering these impacts, there is a call for both monetary and fiscal measures to contain import of cars,” Dasho Penjore said. “The measures may change if conditions change.”

While the RMA has adopted the monetary measure within its purview, the fiscal measures rest with government. “Time has come to seriously contemplate on further improving the public transport system, which I feel the government will consider soon,” he added.

Growing cars

Records with the Road Safety and Transport Authority show that the country bought about 24 new vehicles every day in 2016. Almost half of these vehicles imported are plying the streets of Thimphu.

Based on the figures, about every seven people in the country owns a car while in Thimphu, every two persons own a vehicle. Should the average length of a car be assumed at three meters, all registered cars in Thimphu when lined up one after another would reach Bumthang, covering more than 260 km of road.

In 2001, total vehicles in the country were recorded at 22,527 of which government and corporations owned 2,666. Within a decade, the number more than doubled to 53,382. Government and corporate owned pool vehicles also nearly doubled to 4,622.

Due to the import ban, between 2012 and 2013 only 477 vehicles were imported. After adopting the new taxation, the import ban was lifted on July 1, 2014. This resulted in increase of vehicles from 67,926 in 2013 to 69,602 in 2014. In the following year, number of vehicles increased by 5,588. This nearly doubled in 2016, when 9,107 new vehicles were bought within a year.

As of June 30 this year, there are 88,227 vehicles in the country. This means that 3,930 vehicles were bought in the first six months of 2017, indicating a purchase of 21 vehicles every day.

Implications

The direct impact is already pinching civil servants like Ugyen Dorji. “It’s the traffic congestion,” he said. It takes almost an hour to reach his office in Tashichhodzong from Olakha. This distance is less than 10kms. “If I start early it takes only 20 minutes but if I start at 8:30am I’ll be late to work by an hour,” he said. It takes an hour to drive from Paro to Thimphu (56 KM).

Tshering Wangchuk a corporate employee also said that many drivers lose their temperament in the congestion and often land up quarreling with fellow drivers and policemen.  “The situation will get worse if import of cars is to continue at this rate.”

While an efficient public transport is perceived to be an effective solution, a private employee, Sonam Dorji, who regularly uses city buses and taxis claim that the situation is no different. “Even city buses are trapped in the congestion and there is no special lane or preferences for public transport,” he said.

Thimphu Thrompon Kinlay Dorji said lowering the vehicle loan amount by RMA is a timely intervention and this would help control further traffic congestion in the city.

“Given the present situation, traffic congestion in the city is worsening and Thromde is handicapped,” he said citing lack of budget for road widening. “Cars are parked on the roads due to limited parking space.”

Increasing number of vehicle is also directly proportional to increasing import of petroleum products, according to trade statistics. In 2016, Diesel was the top import item valued at Nu 5.77B. Petrol and diesel combined amounted to Nu 7.53B in fuel expenses last year alone and should the loan repayment be excluded, the entire revenue from hydropower is eroded in importing fuel.

In 2016, import of vehicles amounted to Nu 6.94B outflow of INR. Bhutan trade statistics show that Nu 547M worth of vehicles were imported in 2013, which shot up to more than Nu 2B in 2014, of which Nu 1.6B were imported from India. An official from the RMA said import of vehicles and fuel together contribute to a major chunk of trade deficit. The country experienced a trade deficit of more than Nu 32B last year.

Measures

The RMA has moved the ball to the government with such monetary measures. However, some sources said that the government would not come up with fiscal measures, especially with the elections approaching. “If fiscal measures are to be considered, it could lead to tax revision,” he said.

The government has already revised the sales tax and customs duty on import of vehicles and lifted the ban. But the revision helped little to achieve the desired outcome of curbing import.

On the flipside, the government has lost Nu 676M in 2015 from tax exemptions on import of vehicle for the government, corporate bodies, projects, tourism sector and by granting quota to senior civil servants. There are also various fiscal invectives pertaining to the transport sector,  encouraging more purchases.

The revenue implication was Nu 460M in 2011 but dropped to Nu 16M in 2013 due to the import ban.

As of April this year, financial institutions in the country have provided more than Nu 4.8B of transport loan of the total Nu 94B loan granted in the domestic market.

Some bankers are skeptical that this change in loan to value ratio would prove effective without a fiscal measure. For instance, people avail other loan products and use it to purchase vehicles.

Tshering Dorji

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