The Bhutanese Leading the way.
Industry body proposes changes to lending rules, collateral requirements and working capital financing to support businesses and manufacturing
Improved liquidity in the banking system has not translated into proportionate improvements in access to credit, according to the Association of Bhutanese Industries (ABI). ABI said liquidity and access to finance are different issues. While liquidity reflects the overall supply of funds, access to credit depends on borrowing costs, collateral requirements and banks’ risk appetite.
Credit is flowing into the economy, but selectively. In FY 2024–25, financial institutions recorded 17 percent credit growth, driven mainly by production and manufacturing at Nu 8.26 billion (bn), housing at Nu 6.77 bn and tourism at Nu 6.21 bn.
Domestic credit increased to Nu 257.9 bn from Nu 220.5 bn. ABI said the figures show money is moving through the financial system, but much lending goes to borrowers with stronger collateral and established track records. The credit-to-deposit ratio also rose to 81.8 percent in 2025, indicating that banks are actively lending. However, ABI said the widely cited Nu 12 bn in excess liquidity does not necessarily represent funds that can immediately be deployed as loans.
“Excess liquidity is a headline number, not deployable capital,” ABI said, explaining that cash reserve requirements, statutory liquidity holdings and capital buffers reduce the amount available for lending. ABI also pointed to Bhutan’s relatively conservative prudential requirements.
It said banks are required to maintain minimum capital of 12.5 percent, compared with the Basel standard of 8 percent, and quick assets of at least 20 percent of liabilities. ABI acknowledged that the conservative approach has contributed to banking stability, but said there is also a cost to maintaining high reserves.
It said funds held with the central bank do not generate returns, while the cost of maintaining unremunerated reserves ultimately has to be recovered through lending. This contributes to higher borrowing costs, with industries facing interest rates ranging from 8 to 15 percent.
ABI said its position is not that prudential standards should be weakened. Instead, it called for standards to be reviewed and calibrated against comparable economies, with requirements differentiated according to risk. It also called for a stronger liquidity management framework that would give the central bank more tools to manage liquidity.
There are at least six structural reasons why businesses continue to face difficulties accessing affordable credit.
Cost of funds
The Royal Monetary Authority (RMA) cut the minimum lending rate (MLR) from 6.11 percent to 5.72 percent in 2025. However, the benchmark remains high, while additional loading imposed by lenders further increases borrowing costs.
Provisioning and ECL treatment
Expected credit loss (ECL) requirements make new or unrated borrowers more expensive for banks to carry, potentially pricing them out of credit.
NPL/NPA overhang
More than half of defaulted loan accounts are held by farmers. The history of non-performing loans also makes credit committees cautious across sectors, including those that have not caused the problem.
Asset-based, not cash-flow-based, lending
Banks primarily lend against land or buildings rather than order books, contracts or receivables, as is common in other economies.
No recovery framework
The Insolvency and Rehabilitation Bill of Bhutan 2026 is still under deliberation in Parliament. Until banks can resolve bad loans efficiently, they tend to over-secure good loans.
Product gap
Bhutan has term loans and overdrafts, but lacks receivable financing, factoring, supply-chain finance, warehouse-receipt lending and export pre-shipment credit at meaningful scale.
Collateral remains one of the biggest barriers, particularly for young entrepreneurs and start-ups without substantial fixed assets. The Bhutan Chamber of Commerce and Industry’s (BCCI) Business Regulatory Review describes this as a “collateral trap”, where land and property become prerequisites for credit.
The cost of borrowing is another major barrier. Commercial lending rates of 8 to 15 percent can put Bhutanese businesses at a disadvantage when competing with Indian producers that borrow at similar or lower rates. ABI also said projects with signed offtake contracts and proven margins may be assessed much like those without such assurances because banks place greater emphasis on security than cash flow.
Businesses also face lengthy turnaround times. Delays of several months between loan sanction and disbursement can result in commercial opportunities being lost.
Manufacturing is among the sectors most affected. The Ministry of Finance has noted that manufacturing remains on the lower arm of the K-shaped recovery, despite its employment potential and Bhutan’s low-cost clean electricity. This makes access to finance a key concern alongside market challenges.
Start-ups, first-generation entrepreneurs, small and cottage industries (CSIs) and rural enterprises face particular difficulties. Even concessional lending at 2 to 4 percent under the National Credit Guarantee Scheme and CSI loans has recorded high non-performing loans. This indicates that the challenge is not only borrowing costs, but also credit appraisal and borrower support.
The hospitality sector is facing financing pressures following the end of targeted support for tourism and hotels in December 2025. Agro-processing and export-oriented businesses need foreign exchange and working capital facilities rather than only conventional term loans. Firms expanding production can also reach single-borrower exposure limits in Bhutan’s small banking system.
ABI said banks are behaving rationally within the incentives they face and that cautious lending is structural rather than personal. Provisioning requirements, the absence of an insolvency law, an NPL cooling-off regime and shareholder profit expectations all influence lending decisions.
ABI said banks should transparently publish the spread build-up over the MLR, adopt genuine cash-flow-based appraisal for manufacturing, strengthen project appraisal rather than focus mainly on collateral, publish turnaround-time standards and develop practical working capital products.
The RMA is already working with financial institutions to rationalize the MLR and expected credit losses to improve access to finance. ABI said the exercise should have a clear deadline and measurable outcomes, with industry representatives consulted during the process. The RMA has confirmed that the MLR was reduced to 5.72 percent from 6.11 percent in December 2025.
ABI also stressed that it is not calling for loose credit. It recalled that excess liquidity in 2011–12 fueled a surge in credit towards construction and imported goods, contributing to the rupee crisis. “We are not asking for loose credit. We are asking for better allocation,” ABI said, calling for credit to be directed towards productive, import-substituting and export-earning sectors.
Manufacturing depends on a continuous cash cycle, from raw material procurement to 60–90 days of processing and inventory, followed by another 60–120 days before export receivables are realised. A revolving working capital line is therefore critical, and without adequate financing, factories are forced to operate below capacity.
Underutilised capacity means fewer shifts and jobs. Firms may also have to finance expansion from retained earnings, stretching a two-year expansion to six or eight years, while some owners may resort to informal borrowing at higher effective interest rates, increasing the default risk banks seek to avoid.
This has wider implications for Bhutan, which continues to face high youth unemployment, a labour force participation rate of around 65 percent and continued out-migration. Every stalled industrial expansion means jobs not created for young Bhutanese, who may then look abroad. A range of measures has been proposed to convert excess liquidity into affordable credit. These include completing MLR and ECL rationalization with a clear timeline, enacting the Insolvency and Rehabilitation Bill 2026, and establishing a movable and intangible collateral registry so plant and machinery, inventory, receivables and warehouse receipts can be used as security.
ABI also proposed reviewing the blanket six-month post-NPL cooling period and applying differentiated risk weights for productive manufacturing and export lending compared with consumption lending.
On products, it called for banks to offer genuine working capital instruments, including revolving overdrafts against stock, factoring, supply-chain finance and pre- and post-shipment export credit. It also proposed restructuring the credit guarantee scheme as a partial guarantee combined with mandatory appraisal and post-disbursement monitoring.
For larger industrial projects, ABI recommended bank consortium lending so single-borrower exposure limits do not cap project size, and a review of foreign exchange lending caps affecting industries importing raw materials and machinery from India.
It further recommended channeling long-tenor liquidity through NPPF, RICB and DHI into an industrial refinance window, while developing the government bond market so banks have alternatives to parking funds. A standing ABI–RMA–FI consultative forum meeting quarterly, with disaggregated SME and manufacturing lending data published, was also proposed.
ABI also called for investment in the industrial project appraisal capability of bank credit officers, saying limited capacity to evaluate industrial projects on their merits leads lenders to rely heavily on collateral.
