The Bhutanese Leading the way.
This is after His Majesty The King had expressed concerns on the impact of private money lending over a year ago
The Royal Monetary Authority (RMA) has come out with draft private money lending rules, which, for the first time, not only imposes interest and loan amount restrictions on private money lenders, but also seeks to regulate them. The rules are expected to be finalized in the coming days after receiving endorsement from the RMA board.
The RMA Governor Dasho Penjore said that both RMA and the Supreme Court had been inspired to work on the issue after His Majesty The King, around a year ago, expressed concern on the impact of private money lending on the borrowers.
With the RMA working on the rules in consultation with the Supreme Court since the last one year, any money lending case not adhering to the money lending rules will not be accepted by the courts.
Interest Rate Cap
One of the most important rules is on the loan interest rates. The current practice is to charge compound interest rates on a monthly basis leading to original loans even doubling within a year.
Under the new rules an authorized private money lender will not be allowed to charge an interest which is more than 15 percent per annum as stipulated by section 17(1) of the Movable and Immovable Property Act 1999.
If the rate of interest in the contract exceeds the 15 percent rate per annum the money lender will only get back the principal amount without any interest at all.
The rule says that a loan contract document should clearly stipulate the rate of interest charged, failing which no interest shall be chargeable or recoverable.
It does not end here. Though not mentioned specifically in the rules the RMA in its discussion with the Supreme Court has come to an understanding on discouraging private money lenders drawing up agreements that conceal the real interest rate by inflating the principal amount.
“Earlier the courts would look at the agreement and if everything was in place then it would be honored. However, now the court will also look into and allow any side to challenge the agreement. If a borrower or anyone else can prove through evidence or witnesses that the original principal is smaller then the agreement will get cancelled and both sides will be penalized,” said the Governor.
Lending amount restriction
An authorized money lender can lend a maximum of Nu 500,000 to a single borrower. The RMA Chief General Counsel Damcho Tenzin said, “This amount has been set to limit the exposure of the borrower.”
The Governor said that the Nu 500,000 amount had also been rationalized based on the Micro Finance Institutions regulations that allow the same amount for borrowing, rural needs and international practices.
The legal Counsel said that if the amount lent out by a moneylender exceeds Nu 500,000 then no court would accept the case and it would be the loss of the moneylender.
However, recognizing the need to borrow smaller amounts of money for difficult times among family members, friends, neighbors and others, especially in rural areas, the rule says that a person can lend an amount not exceeding Nu 90,000 without having to register as a money lender with the RMA.
The Governor said that while registering with the RMA the private moneylenders would have to disclose their source of capital in a prescribed form. This would allow the RMA to check the source of funds for money lending.
Registration and regulation of moneylenders
A person intending to engage in private money lending business will have to obtain a registration certificate from the Authority by submitting an application in a prescribed format given by RMA. The RMA will take the onus of monitoring these private money lenders.
The certificate shall be non- transferable to any person and it will be valid for one year after which it will have to be renewed .
RMA reserves the right to reject an application or cancel a license if the applicant is a public official, is declared bankrupt, has a criminal record, if the earlier registration certificate of the applicant has been cancelled by the order of a Court, if applicant has a Non-Performing Loan, if the certificate is being transferred to another person, has failed to provide all the documents and has failed any additional criteria as prescribed by the RMA from time to time.
The Money Lender will also need to get a trade license though the bulk of the regulation and monitoring will be done by the RMA.
Duties of the lender
It shall be mandatory for the authorized lender to execute a valid written contract with a borrower as per the provisions laid down in the Evidence Act of the Kingdom of Bhutan 2005 and Contract Act 2013.
The onus to verify and confirm any property being pledged as security shall vest with the lender. He or she shall not transact or carry out any act which is detrimental to the secured property under his custody.
The lender shall keep all regular books of accounts for the purpose of personal income tax and regulatory purposes. The RMA at any time and without notice can check these books and other documents.
This also includes a requirement submit to the authority on a quarterly basis, information on loan portfolio, including but not limited to the number of borrowers, loan outstanding in the prescribed format.
The lender cannot publicly solicit business through advertisement or through the employment of agents.
The lender has to issue a duly signed receipt to the borrower to acknowledge any loan repayment.
The borrower on his or her part cannot take multiple loans by pledging the same security.
Judicial role and date of effect
The RMA Governor said that once the rules are adopted by the RMA Board it will be the main law governing private money lending in Bhutan.
Dasho said that RMA would send copies to the Supreme Court and the Chief Justice in turn has agreed to issue the rules to the High Court and District Courts asking them to implement these new rules.
The rule under section 7.2 says, “Courts shall dismiss any monetary case during any stage of the hearing, if the Authorized Private Money Lender has violated any provisions of this rule and regulation.”
This would mean that people who are not registered as private money lenders and those who are registered but lend more than Nu 500,000 will not even see their cases entertained by the court. Those who charge more than 15 percent interest will only get back their principal and not the interest rate.
The Governor said that once it is adopted by the Board there would a three months sensitization process from 1st January to 31st March 2017. He said it is likely the rules called “The Private Money Lending Rule and Regulation of Bhutan 2016,” would come into effect from 1st April 2017.
He said that any private loan from this date onwards would have to abide by the rules or find itself not being recognized by the courts.
He clarified that the rule would not apply to past private money lending cases that took place before this law came into effect.
In terms of the purpose of the rules it says it is to regulate private money lending business and ensure that it is brought under the purview of the financial sector through the application of this rule and regulation.
It also says its purpose is to minimize the threat to the financial system and enhance the effectiveness of monetary policy and management and prevent related litigations and adverse socio-economic consequences arising thereof.
Dasho said that the rule is not to kill private money lending but to regulate it and allow it to operate as one of the tools of RMA’ Financial Inclusion Policy.
The Governor said that the rules would also provide an important assistance to the Judiciary in handling such cases as money lending cases in violation of the above rules would be thrown out by the courts.
