There was initial jubilation when the government announced the imminent release of the Economic Stimulus Plan (ESP). Expectations were high, as reflected in the 193 applications submitted to the participating financial institutions. However, only 12 projects have been approved so far, with a total sanction of Nu 8.3 million, while the rest remain under review.
Prime Minister Dasho Tshering Tobgay succinctly captured the ESP situation, expressing concerns over the slow progress of the ESP. He acknowledged that the initiative had not delivered the anticipated economic impact.
So, what’s the issue?
The government entrusted financial institutions (FIs) with the critical responsibility of disbursing loans under the Economic Stimulus Plan (ESP), based on specific criteria developed in coordination with the Royal Monetary Authority (RMA). This collaborative effort was intended to streamline the process and ensure that funds were allocated to projects that could drive economic recovery. However, a key issue emerged: the lack of collateral requirements for loan applicants.
In most lending scenarios, collateral acts as a safety net for the lender, providing a form of security in case the borrower defaults. But with no such safeguard in place under the ESP, a significant risk has been introduced into the system. This opens the door to potential misuse—a savvy individual could present a highly compelling business proposal, secure approval from the FI, and then vanish, possibly even leaving the country. Without collateral, the financial institution has little recourse to recover the funds.
In this scenario, the financial institutions would bear the burden of the loss. They may be forced to reimburse the loan amount from their own reserves, which could, in turn, compromise the stability of the institution. More worryingly, the funds being managed are not just institutional reserves; they are largely public money—deposits from ordinary citizens. So, any significant loss due to a defaulting borrower without collateral could have broader repercussions on the financial sector, potentially eroding public trust in these institutions.
The absence of collateral, therefore, is not just a minor technical detail; it is a structural vulnerability in the ESP’s implementation. Without adequate safeguards, financial institutions may be hesitant to approve loans, leading to a bottleneck in the flow of funds intended to stimulate the economy. Furthermore, even when loans are approved, the long-term sustainability of the projects funded remains in question, especially if the borrower has no tangible commitment or stake in the form of collateral.
The Prime Minister reassured that discussions are underway to address this, but as long as FIs are responsible for reimbursing failed loans, a comprehensive solution remains elusive. Their primary duty is safeguarding public funds.
Rumors abound. Some claim that the loan process is complex and that even bank officials struggle to navigate it. To ensure loans go to viable projects that guarantee returns, FIs are thoroughly scrutinizing proposals—a time-consuming process. The government has stepped in, offering additional manpower to help streamline the system.
The ESP, it seems, is proving to be more of a challenge than expected.
