Nu 500,000 amount restriction at maximum 15% per annum interest
The Royal Monetary Authority (RMA) board on 29th December approved ‘The Private Money Lending Rules and Regulations 2016,’ which restricts private money lending to Nu 500,000 per person.
The main objective is to regulate private money lending business and bring such activities under the purview of the financial sector.
The RMA and the Supreme Court worked on the rules over the last one year after His Majesty expressed concerns on the impact of private moneylending over a year ago.
The rule shall come into effect from 1st April 2017 to allow a three-month preparatory period from 1st January 2017 to 31st March 2017 to facilitate lenders and borrowers to start complying with the rules.
The current practice is to charge compound interest rates on a monthly basis leading to original loans even doubling within a year. Under the rules if the rate of interest in the contract exceeds 15 percent rate per annum the money lender will only get back the principal amount without any interest.
The rule says that a loan contract document should clearly stipulate the rate of interest charged, failing which no interest shall be recoverable.
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.
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.
Any private loan from 1st April 2017 onwards would have to abide by the rules or find itself not being recognized by the courts.
The RMA Governor Dasho Penjore said, “With these rules there will be no informal private lending market as it will be a formal one with registration and regulation.”
The RMA in a release said that the Royal address of His Majesty during the 109th National Day celebrations in Trongsa underscored the importance of improving access to credit for our youth and rural people. It said it is the responsibility of institutions and policy makers to respond to the national concerns and priorities.
Among the various initiatives that the RMA will be embarking on, one of the focus areas is to improve access to finance for the rural poor. Along this line the Board of the Royal Monetary Authority of Bhutan approved the Rules and Regulations for Deposit Taking Microfinance Institution (DMFI). Deposit-taking Microfinance Institution means a financial service provider that primarily conducts deposit-taking microfinance business (i.e. regular receiving of deposits from the public and using of such funds for microloans up to Nu. 500,000).
The regulation aims to promote Financial Inclusion by way of increasing penetration of the financial services in the rural pockets. It aims to protect the illiterate micro clients from abusive lending practices, prevent unregistered MFIs from entering the market and enable current MFIs to lend legally and facilitate the potential MFIs to take deposits from public.
The RMA Governor said that this is a landmark financial inclusion policy as it helps villagers and rural communities by mobilizing their deposits and taking lending to their door steps.
The Governor said that in a highly monetized economy where 99.9 percent of transaction is in cash the money from the villagers can be collected for deposits.
If a MFI does well then there is a possibility of being allowed to open a small bank branch. Depending on how MFIs do the RMA would see the need or not to license new commercial banks.