The chamber highlights monetary measures as an intervention for businesses in the private sector
Extending the gestation period by three-five years, reducing the Equated Monthly Instalments (EMI), extending long tenure loans from 15 years to 30 years, reducing the Minimum Loan Rate (MLR) by reducing the saving rate and fixed deposits, and providing bridging (soft) loans at 5% or below till the economy is fully recovered are some of the post-June intervention measures for businesses as recommended by the Bhutan Chamber of Commerce and Industry (BCCI).
“As most businesses will continue to face difficulties to service their loans after the expiry of Phase III monetary measures, private businesses need to be supported through relaxation of the existing banking prudential norms,” a BCCI official said.
According to the BCCI, the introduction of the ballooning EMI system would also help the businesses. The initial EMI can be lowered to help businesses during the period of lower income, and subsequently, increase the EMI as the business environment improves.
“However, this may have to be used after proper negotiation between the banks and borrowers,” the official said.
Once the Phase III measures end, the BCCI feels that there will be a significant increase in the principal outstanding and the EMI, ultimately impacting businesses and banks negatively, especially if the economy does not rebound strongly. However, indications are that this will be the case.
“It will be wise to take stock of the situation and to quantify the quantum of accumulated interest on account of the deferred 50% interest as it is important that the banks collect this data to assess if the deferred interests are a significant amount,” the BCCI official said.
According to the BCCI, the deferred interest is significant as most borrowers have availed of the deferment, and it may be necessary to put in place measures to mitigate the negative impacts.
For instance, the chamber stated that it is time for the Financial Institutions (FIs) to move from asset-based financing to cash flow-based financing as one of the main problems faced by businesses in Bhutan is the lack of access to finance.
All FIs in the country requires an individual or business to provide collateral to receive a loan, besides having to inject equity in the investment, according to the BCCI official.
“This marginalizes the population that does not own collateral as they become ineligible for loans and enhances the gap between the haves and haves not,” the official said.
Despite the existence of the Credit Information Bureau of Bhutan (CIB) system since 2014, the FIs in Bhutan have failed to move toward becoming a credit-based society and remain complacent by relying on collateral, according to the BCCI.
BCCI feels that FIs within the country must now evolve from their traditional ways, and gradually start issuing loans based on the credit-worthiness of the individual or business in order to stimulate business growth and development.
According to the chamber, to promote business and investments, the process of approving or issuing loans by the FIs must move from asset-based financing to cash flow-based financing or profitability of the business. The FIs should also institute a system of providing loans based on the books of accounts and the current valuation of the company.
For businesses in the informal economy, the chamber recommended that microfinance options can be offered to them as many micro and small business establishments operating in the informal sector have been detrimentally impacted as a result of the pandemic.in
Though the government has extended working capital loans to businesses at a subsidized rate, many of those in the informal sector were not able to avail this facility simply by virtue of them being informal, according to the BCCI.
As many of these businesses will require small and short-term financial assistance, the BCCI recommended that a microfinance scheme be extended to individuals or businesses in the informal sector as they currently have no option of availing any financing assistance to kick-start their business.
The chamber also highlighted that the support measures can include fiscal incentives (income tax waiver) to FIs and microfinance organizations, which is possible under section 28 of the Fiscal Incentives Act of Bhutan 2021.
And with the existing External Commercial Borrowing (ECB) regulations being restrictive for business entities to secure funds from abroad, BCCI stated that these regulations could be reviewed and revised to facilitate access to finance by relaxing the criteria for qualification of lenders, instituting mechanism for mortgaging assets for external lenders and repayment of convertible currencies, among others.
Sherab Dorji from Thimphu