The Bhutanese Leading the way.
The Economic Affairs Committee (EAC) of the National Council has highlighted significant barriers to Rural Credit Access in Bhutan, revealing that the agriculture sector, despite employing nearly half of the country’s workforce, receives less than 5% of the total credit portfolio.
The EAC’s comprehensive report, presented during the Seventh Sitting of the National Council, outlines urgent reforms needed to boost financial support for rural communities, following His Majesty The King’s call for improved credit access to promote entrepreneurship and agricultural growth.
Chairperson of EAC, Tshewang Rinchen, led the presentation of the report, which outlined key findings, challenges, and proposed solutions. Despite agriculture employing nearly 44% of the country’s workforce, the sector receives less than 5% of the total credit available. Bhutan Development Bank Limited (BDBL) was identified as the primary institution providing rural credit.
The report highlighted several obstacles both lending institutions and borrowers face in the rural credit landscape. Lending institutions struggle with assessing the creditworthiness of borrowers, particularly due to the high-risk nature of agriculture and limited insurance coverage. On the other hand, rural borrowers face challenges such as high-interest rates, limited financial literacy, complex documentation requirements, and issues related to collateral valuation, which often deter them from seeking loans.
To address the challenges facing rural credit access, EAC proposed 11 key recommendations aimed at improving financial inclusion for rural communities. First, the committee emphasized the need to launch financial literacy programs to educate rural residents about loan services, interest rates, and repayment terms. This initiative would help improve financial understanding and decision-making among borrowers.
Next, EAC recommended streamlining the loan application process, particularly for residents in remote areas, to reduce bureaucratic hurdles and lower associated costs. Additionally, the committee suggested creating financial products tailored to the unique income sources and economic activities of rural communities, ensuring that loan offerings are better suited to the rural context.
The committee also called for raising the ceilings on personal loans to reflect the rising cost of living and meet the growing financial needs of rural residents. Alongside this, EAC proposed a review of interest rate policies to make loans more affordable, ensuring fairness for borrowers while considering the socio-economic conditions of rural areas.
Further recommendations focused on improving the efficiency of the lending process. The committee urged financial institutions to reduce the turnaround time for loan approvals, ensuring faster access to funds, especially during critical agricultural seasons. In the realm of education, they suggested offering subsidies or interest rate concessions for educational loans, particularly for low-income students.
EAC also recommended developing loan schemes for young entrepreneurs in rural areas, even those without collateral, to foster innovation and youth-led businesses. In addition, the committee stressed the importance of ensuring a steady and accessible supply of credit products in rural regions, facilitating continuous financial support for local communities.
To promote broader economic growth, EAC called for support in diversifying income sources through the growth of agribusiness, eco-tourism, and cottage industries. These initiatives could help rural communities build financial resilience. Finally, EAC proposed significant investments in infrastructure and market linkages to improve income generation opportunities and facilitate loan repayments, ultimately enhancing the financial stability of rural borrowers.
The review also highlighted that, despite agriculture being crucial to the economy, it receives a disproportionately small share of available credit. In 2023 and 2024, rural credit levels significantly dropped to Nu 797.18 million and Nu 3736.56 million, respectively, likely due to shifting priorities and economic constraints.
Lending institutions face challenges in assessing the creditworthiness of borrowers, particularly for agricultural loans, as the sector is inherently risky, with limited access to insurance. On the borrower’s side, high-interest rates, poor financial literacy, and cumbersome documentation processes remain significant barriers to credit access.
Furthermore, stringent collateral requirements such as needing a minimum of five acres of land are a significant obstacle, as many small farmers do not have the necessary land to secure loans. This is compounded by the rising property taxes under the Property Tax Act of Bhutan 2022, which has made land more expensive and thus harder for rural residents to use as collateral.
EAC’s proposed solutions include revising the loan ceilings to accommodate higher financial needs, especially in the face of rising living costs in rural areas. The Committee also recommended revising current interest rate policies to make them more equitable and affordable.
EAC also emphasized the need for financial institutions to adjust collateral requirements, particularly in light of increasing land values due to the Property Tax Act.
To streamline the documentation process, EAC proposed simplifying procedures and potentially revisiting the role of local government officials in assisting with loan applications, as was the case in the past. This could alleviate the burden on borrowers, especially in remote areas, and reduce the cost and time required for obtaining a loan.
The EAC’s report offers a thorough analysis of the barriers to rural credit access and proposes pragmatic solutions to address them. The committee’s recommendations aim to reduce bureaucratic obstacles, enhance financial literacy, and ensure more affordable and accessible credit for rural communities.
The deliberation on the recommendations will continue on 27th November 2024.
