Access to affordable and timely finance continues to be one of the constraints limiting the growth of businesses in the country. The Business Regulatory Review by the Bhutan Chamber of Commerce and Industry says that restrictive collateral requirements, high lending rates, and limited financing are making it difficult for businesses to start, expand, and remain competitive.
For aspiring entrepreneurs, having a viable business idea is not enough to secure a loan. The Bhutan Chamber of Commerce and Industry says the requirement for collateral to access credit is a bottleneck for the business sector.
This means land and property often become prerequisites for accessing finance, creating what the report describes as a “collateral trap” for young entrepreneurs and start-ups without substantial fixed assets.
Tandy Wangchuk, the President of BCCI, says access to finance remains a challenge even if young entrepreneurs have brilliant business ideas. “When seeking finance from banks, collateral is required, particularly in urban areas. If they do not have collateral, it becomes very difficult to secure a loan.”
Entrepreneurs say financial institutions often use conservative land valuations during loan assessments, which reduce the borrowing capacity of businesses.
Phurpa Gyalmo, manager of a private processing and packaging company, adds that it is particularly challenging for those from remote areas. “As we are from a remote area, it is challenging for us to get sufficient loans because the amount depends on the value of our collateral, which is very low. The government has supported us so far, and we hope that we can get the same amount of loan as those who have collateral in urban areas.”
“Banks do not support small start-ups at all. They mainly support medium and large enterprises because they look at their capacity to repay loans. These enterprises can also provide land and buildings as collateral,” adds another entrepreneur who did not want to be identified.
The problem also extends to established businesses. According to the report, the collateral requirement affects access to overdraft facilities, which businesses rely on to manage working capital and day-to-day expenses.
BCCI says this can leave businesses struggling with liquidity, even when they need funds to expand or respond to unexpected financial demands.
The cost of borrowing is another concern. The report puts lending rates between seven and 15 per cent, saying high interest rates eat into business profits and leave less money for reinvestment, expansion and job creation.
During the summer session, parliament directed the finance ministry and the Royal Monetary Authority to explore ways to reduce lending rates and make credit more affordable.
Following the directive, the ministry and the Central Bank have submitted a joint action taken review report to the Economic and Finance Committee of the House.
The Central Bank also issued a news release earlier this month revising the Single Minimum Lending Rate from 5.72 per cent to 5.37 per cent, which comes into effect next month. The Central Bank reviews the Minimum Lending Rate every six months.
The Economic and Finance Committee says it will follow up with the financial institutions to monitor if the revised minimum lending rate is being implemented.
The report recommends using a common land and building valuation as a baseline for collateral valuation to ensure more realistic assessments.
BCCI recommends that the government and the Royal Monetary Authority review the minimum lending rate framework to ease access to credit while maintaining banks’ financial viability. It also recommends moving beyond fixed-asset collateral towards lending based on factors such as inventory, cash flow, credit history, turnover and confirmed business orders.
For Bhutan’s private sector to drive economic growth, businesses need not only opportunities to invest but also the financial capacity to take those opportunities forward.
Kelzang Chhophyel & Namgay Wangdi
