MoEA proposes to allow External Commercial Borrowing for all and also cash flow based loans by banks

Also calls for Micro Finance for small businesses outside banking system and relaxing rules to list on the stock exchange to raise capital

The Ministry of Economic Affairs (MoEA) as a part of its recommendations to help the economy recover from COVID-19 has recommended certain measures to ease access to finance for businesses.

One is to allow External Commercial Borrowing (ECB) for all companies, the other is providing micro-finance for small businesses outside the banking system, the third measure is giving loans not based on assets but the cash flow record of the company and finally making it easier for companies to list on the stock market.

Foreign borrowing for all

The MoEA says that the current External Commercial Borrowing (ECB) guidelines allow incorporated companies registered under the Companies Act to avail commercial loans in the form of bank loans and suppliers’ credit from foreign lenders.

However, only export oriented entities that have the capacity to earn in the currency in which the ECB is raised so that it will be able to meet its repayment obligations, are eligible to avail the ECB.

This means that only a company earning dollars from exports can tap international financial institutions for dollar loans.

The ministry says that though the ECB guidelines allow raising funds from the Indian market, this is not a desirable option as interest rates in India are comparable to Bhutan making the cost of borrowing higher.

It says it is a better option to secure ECB in convertible currency from other markets besides India where the cost of borrowing is relatively low. However, as most businesses in general and the manufacturing sector in particular cater to the Indian market and therefore the source of earning is in INR, meeting the repayment obligations in CC is a difficult proposition.

The MoEA, therefore, recommends that businesses that do not earn CC also be allowed to avail ECB with the government taking on the onus of managing the repayment in the desired currency.

It says the government can access the initial capital availed in the form of CC and will only be responsible for meeting the interest component of repayment which in most cases will be relatively low at under 4% including currency hedging risks.

The ministry says doing this will allow many Bhutanese firms to secure relatively cheap loans without crowding out the local domestic debt market.

It says that to start with, the RGoB can allow Bhutanese firm to avail ECB within certain threshold limits like under USD 5 million to ensure that risks on CC reserves are minimized and mitigated.

This would also be keeping in mind the sustainability of the foreign currency reserves.

Microfinance businesses outside the banking network 

The MoEA says that many micro and small business establishments operating in the informal sector have been detrimentally impacted by the pandemic. These include vegetable vendors, street hawkers, roadside shops along the highway, daily wageworkers, etc. Although the government has extended a working capital loan to businesses at a subsidized rate, many of those in the informal sector will not be able to avail this facility simply by virtue of them being informal.

It says that due to the nature of their businesses, they will also not be able to provide collateral to avail a loan to resume their operations.

It says many of these businesses will require a small financial assistance for the initial purchase of their goods. For example, a momo or thukpa seller will require about Nu. 2,000-5,000 to purchase the raw materials to prepare and sell their food for the day. However, it will probably take about 4-5 sales cycles to have enough money to repay the initial borrowed capital.

The ministry recommends that a micro finance scheme be extended to businesses in the informal sector as they currently have no option of availing any financing assistance to kick-start their business. This can be extended through the existing banking channels and microfinance companies under the same terms of the Priority Sector Lending (PSL) guidelines of the Royal Monetary Authority.

 Loans based on cash flow instead of assets

Internationally Bhutan has one of the highest loan collateral requirements ensuring that only the rich and well to do can avail loans.

As a result, one of the main issues faced by businesses in Bhutan is the lack of access to finance. Financial institutions require an individual to provide collateral to receive a loan besides having to inject an equity in the investment.

The ministry says this marginalizes the population that does not own collateral, as they become ineligible for loans.

It says that despite the existence of the credit information bureau system since 2014, financial institutions in Bhutan have failed to move towards becoming a credit-based society and continue to rely on collateral rather than making a risk based judgment.

It says financial institutions should be encouraged to start issuing loans based on the credit-worthiness of the individual or business to stimulate business growth and development. In other words, they should move from asset-based finance to cash flow- based finance.

It says the Royal Monetary Authority as the regulatory body for financial institutions within the country can look into this aspect and come up with regulations to encourage banks to move in this direction.

 Relax requirements to list on the stock market

As per the existing rules for listing a company on the Bhutanese stock market, a company has to be incorporated and must have a track record of profitability for at least two financial years preceding the date of application.

This means that newly established companies that wish to raise capital from the equity market cannot do so under the current norms. Even for established companies that have been operating for quite some time but have not made a profit for two consecutive years, this route is closed.

The MoEA says that although, similar rules exist in other countries with the primary intention of protecting investors, in Bhutan’s context, other avenues to secure investments for start-ups such as private equity placement and a robust venture capital ecosystem does not exist.

The ministry says that once companies are established and have been profitable for at least two years, raising capital from traditional sources such as banks is easier and a better option as the cost of debt is always considered to be cheaper than the cost of equity.

Also by virtue of being established for quite some time and having made profits, it would have built on capital or fixed assets that can be used as a security to avail a loan.

The ministry says that to allow more avenues for new businesses to access funds, it is recommended to relax the current requirement for companies to have a track record of profitability for at least two financial years.

It says the due diligence and investment risk prior to investing in the company should be left to the investor rather than the regulatory body setting up stringent barriers on behalf of investors.

The regulatory body can however facilitate in minimizing risks to investors by ensuring that all disclosures and statutory transparency obligations are made by the company prior to the sale of shares.

An official shared that companies like Facebook and Google would have never happened in Bhutan as they would not have had access to capital or qualified under the current stock market rules.  

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