External Commercial Borrowing through foreign FI registered in Bhutan

Over the years one of the main financial demands of Bhutan’s big business and industrial sector has been about allowing them to borrow from outside Bhutan given the limited liquidity in Bhutan for major projects.

However, the ground reality has been that even the major business houses have not been successful in raising funds from outside Bhutan given the stringent international norms and cross-border legal issues.

The Royal Monetary Authority will be coming up with a framework in 2018 to allow External Commercial Borrowing (ECB) but with the main condition that the FI has to be registered in Bhutan.

The RMA Governor Dasho Penjore said, “Borrowing money from outside Bhutan will not happen simply because unlike what our business people think it is very difficult to get funds from financial markets like Hong Kong, Singapore etc.”

He said Bhutanese businesses do not get access to such funds, and so instead the RMA could serve as a bridge to the rest of the world by coming up with a legal framework.

The governor said this in the backdrop of the EDP 2017 saying that ECB guidelines will be reviewed by 2017 to ease access to external funding.

The governor said that the possibility was of having a foreign financial institute like World Bank, Asian Development Bank, International Finance Corporation etc tying up with credible local partners like NPPF and DHI to set up a Financial Institution.

Now this FI would not be like other normal commercial banks receiving deposits etc but could bring in external capital to borrow out to business ventures in Bhutan.

Also, unlike foreign banks it would have legal status in Bhutan as it would be registered under the laws of Bhutan.

Dasho said that the main reason that Bhutanese businesses cannot raise funds outside Bhutan is due to legal jurisdiction issues. He gave the hypothetical example of a Thai company coming to borrow money from banks in Bhutan. “No bank in Bhutan will lend that Thai company money because they know that the banks recognized legal jurisdiction is only within Bhutan and they would not be able to recover the money in case of issues,” said Dasho.

The governor said that currently Bhutan has no specific law saying that one cannot borrow from outside but he also pointed out two potential risks.

One he said was that one of the only ways foreign FI’s would agree to loan money to a Bhutanese company is through a sovereign guarantee from Bhutan which would pose risks on Bhutan.

Dasho said that even without such a sovereign guarantee if a Bhutanese business or individual borrowed large sums from outside and is unable to pay back, it could lead to pressure and implications on the country at the international level.

He said that apart from a credible foreign partner with adequate funds the RMA would encourage credible local organizations like NPPF and DHI to be the local partners.

Dasho pointed out that once such a FI is registered in Bhutan then it would become a legal person and so enjoy all the legal rights like other banks in Bhutan in terms of dealing with Bhutanese companies and clients.

The RMA wants to do its studies and proceed slowly and carefully on the issue and so a legal framework on this would be ready only by 2018.

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