Micro-finance institutions (MFIs) in the country have no policy objectives although there are rules and regulations governing operations of institutions and no clear linkage between microcredit distribution and poverty incidences.
According to the performance audit report of the Royal Audit Authority (RAA) on microfinancing findings pointed out there are only about 5% of total loans devoted to agricultural development. It was found that non-performing loans (NPL) of microfinance are higher than the overall NPL in the banking industry.
The report states that the operations of Bhutan Development Bank (BDB) and erstwhile Rural Entrepreneurial Development Corporation Limited (REDCL) had issues pertaining to sustainable operations. BDB sustained overall losses in the past five years and REDCL absorbed much higher losses leading to concern.
There are issues of inadequate appraisal of loan projects leading to failure of projects. There are cases of project failures due to non-monitoring of the projects. In fact project monitoring was not undertaken for most of the loan projects. Non-monitoring is one of the main reasons for failure of loan projects.
The report also revealed that there are undesirable socio-economic impacts of microfinancing on rural people. BDB had large number of litigation issues across the country.
Similarly, there were instances of loss of land and property due to loan delinquency in relation to loans in BDB. RAA observed issues of incorrect application of interest rates on loans. It was also observed that the erstwhile REDCL loans were focused on agricultural projects and the disbursements were inconsistent with the cropping patterns and seasonal requirements.
RAA recommended aimed at addressing these issues in microfinance. It recommended that the Royal Monetary Authority (RMA) should provide comprehensive policy direction for direction of microfinance development.
Today Bhutan is facing high rate of youth unemployment but there is no MFI dedicated to youth entrepreneurship.
RAA also recommended that there is no policy objective at the national level as to what outcome microfinance intends to achieve except for rules and regulations for deposit taking and non-deposit taking MFIs. It is therefore imperative for RMA as a regulating authority to come up with a comprehensive policy and strategies to promote microfinance development in addition to the extant rules and regulations.
It has recommended that REDCL and BDB need to develop strategies for sustainability.
Sustainable operations are key to delivery of micro-financial services efficiently and effectively. It was learnt that both the BDB and REDCL are not generating enough profits to offset the operational costs.
It is recommended that erstwhile REDCL needs to align loan approval with cropping patterns. The loans received at the right time in part will determine success rate of the loan projects. There is also a need for REDCL to ensure that loans are disbursed at the time of need and especially as per cropping patterns for agricultural projects.
It is also recommended that BDB and REDCL need to institute robust monitoring of loan projects. Robust monitoring mechanism helps in maintaining the quality of the loans and creating positive socio-economic impact on clients. There is a direct relation between monitoring, loan quality and socio-economic impacts of micro credit.
For instance, non-monitoring of the loan projects leads to increase in the number of NPL. With high number of NPL the likelihood of litigation of cases increases and accordingly costs increase. Seizure of land and property and their subsequent auctions result in negative socio-economic impact on the clients.
Consistent rise in NPL also threatens the sustainable operations of the banks in the long-run. Most of the issues reported herein are mainly caused by non-monitoring of the loan projects. Therefore, there is a need to institute a robust mechanism of monitoring of loan projects at BDB and REDCL.
It has recommended that REDCL needs to review the current memorandum of understanding (MoU) between BDBL and REDCL.
As can be seen from the issues highlighted intent of the MoU between REDCL and BDBL could not be implemented. BDBL did not carry out the post sanction services as agreed in the MoU yet REDCL continued making the payment of the fees as agreed.
Further, fees were not determined at specific activity level. There is a need for REDCL to review the MoU in the light of the above issue and determine a better working modality and discontinue payment of the commission for the activities not carried out such as follow-up, recovery and legal services.
It states that BDB needs to update the interest rates of loans. Although it is the responsibility of the client to update the loan interest to the reduced rate, it is also incumbent on the bank to ensure that the benefits of the reduced rates are passed on to the clients who are mostly rural-based.
Dechen Dolkar from Thimphu