Low applications seen for BDB’s new collateral-free community development loan scheme due to 15% interest rate

Bhutan Development Bank (BDB) launched a collateral-free community development loan worth Nu 1 billion as part of its micro-lending program which received over 30 inquiries with 12 applications submitted.

As of 9 March 2024, only three loans have been approved.

Although the loan was introduced in November 2023, its actual implementation didn’t occur until the end of January 2024.

Despite being a government-owned development bank dedicated to enhancing rural prosperity through prompt, efficient, and sustainable financial services, it encountered substantial criticism from the public due to its 15 percent annual interest rate.

A bank official stated, “In designing the product, we meticulously addressed these issues and risks. Moreover, sourcing funds involves substantial costs. The high cost of funds and the credit risk premium are both pivotal factors considered in the determination of interest rate. Following banking principles, there will always be a trade-off between interest rates and collateral requirements. While BDB operates as a development bank, we must adhere to basic banking principles and maintain a balance. The 15 percent per annum rate remains the lowest for similar products without collateral requirements in the financial sector.”

“For those seeking loans at lower interest rates, our earlier agriculture loan products are still available across all branches, offering rates as low as 10.25 percent by leveraging agricultural land, including Chuzhings, which are not accepted in other financial institutions,” the official added.

The introduction of the new loan scheme aims to offer customer convenient access to credit facilities without the requirement for collateral or mortgages. This initiative is tailored to streamline financing for ambitious entrepreneurs who do not possess assets to mortgage with traditional banks as per the bank.

“The primary aim in creating the community loan product was to offer financial access to rural communities unable to secure loans due to collateral requirements. In achieving this, it’s crucial to safeguard the bank’s financial sustainability by factoring in credit risks stemming from the absence of collateral in loan pricing. Our objective is to ensure that funds reach the targeted customers and intended projects in the end.”

The Community Development Loan (CDL) is a Micro Loan product crafted to enhance financial inclusion among rural farmers and other individuals, especially those currently restricted from accessing credit services due to the unavailability of collateral.

As per a source, the response to the new loan scheme has been less than favorable. Fewer individuals are observed to be taking advantage of this loan primarily due to the economic conditions of the country and the high interest rates imposed by the bank.

Acknowledging the inherent risks associated with extending credit facilities, BDB emphasizes the importance of diligent monitoring and risk mitigation measures. The bank’s centralized approval and sanction process ensures adherence to regulatory standards and promotes transparency in loan operations.

The loan scheme targets aspiring entrepreneurs between the ages of 18 and 60 who seek to undertake projects costing up to Nu 500,000.

Key eligibility criteria for prospective borrowers include possessing a genuine interest in their proposed projects and ensuring that no existing loans for the same activity have been obtained from either BDBL or other financial institutions. Additionally, applicants must provide essential documents such as a valid CID copy, a family tree, and certification from local governance confirming residency.

The CDL scheme features a maximum term period of 10 years, excluding the gestation period, providing borrowers with sufficient time to establish and grow their enterprises.

BDB stands out as the sole bank prioritizing rural farmers and promptly took charge of the nationwide credit initiative, primarily offering seasonal, short, and medium-term loans to small-scale farmers across the country.

Additionally, the bank initiated lending activities to industrial sectors, providing both term finance and working capital to industrial and agro-based enterprises.

This is by far the highest lending interest provided by the bank.

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