The Bhutanese Leading the way.
The Royal Monetary Authority (RMA) did an intensive review of all the Medium Sector Economic Stimulus Plan (ESP) loans (ranging from Nu 10 million to Nu 100 million) coming to 37 accounts excluding the 4 already investigated by the Anti-Corruption Commission (ACC).
The RMA found that there was only one case of a Nu 56.58 million (mn) project to set up a dolomite powdering unit in Samtse called Kinley Powdering which had tried to change its business location and merge it with his existing Chundu Powdering.
However, the Bhutan Development Bank Limited (BDBL) did not approve of this change in location and plan, and put the loan on hold.
The Nu 5.8 mn that had been released in his operative account by the BDBL for disbursal was also frozen, and the BDBL can get the money back.
In essence, there was no financial implication.
The owner of Kinley Powdering had approached the BDBL saying that the original location approved for his business is not good and prone to floods, and so he wanted to merge it with his existing Chundu Powdering, where he is a major shareholder.
Getting suspicious, the BDBL not only rejected his proposal but also did not release the Nu 54 mn loan. Even the Nu 5.8 mn in the operative account has been frozen.
The BDBL took the action as the changed proposal of the business person was not in line with the ESP criteria, which is either for setting up a new business or expansion of an existing unit.
In short, this was an attempted material deviation that the BDBL stopped.
The BDBL also rejected the revised proposal as it would result in a change of shareholding in Chundu Powdering, which is not permitted.
The BDBL was planning to provide the individual with an opportunity to establish the business as per the original proposal. If this was not fulfilled, the entire loan was to be cancelled. The RMA has now asked for this loan to be cancelled.
The BDBL is not keen to take the case as an RMA finding, as this is something that the bank had already detected and taken action on with no financial implication.
The RMA found 13 clerical mistakes in loan documents in either typos or figures but they did not have any major impact on the loans and the loan system. One type or error was a rounding error where the loan committee approved a certain set figure but it was later rounded with the impact being a few hundreds.
Another example of error was forgetting to mention the full EMI in the loan document though the online system still showed it.
Here, a source at the BDBL said they handled 3,969 loan applications in a very short period, and so there would be some clerical errors.
Another issue was that the RMA found five instances where the BDBL had failed to get Ministry of Industry Commerce and Employment (MoICE) clearance documents even though these businesses would have them since they are already licensed.
The RMA noted a lack of capacity at the MoICE in terms of setting the categorization of businesses, and was virtually rubber stamping, and the RMA feels this needs to be improved.
The medium sector loan ceiling is Nu 100 million, of which Nu 90 million is disbursed. A gestation period is also provided, during which the interest payable is calculated and included as part of the total loan size.
The RMA identified three instances where, after adding the interest accrued during the gestation period, the total loan amount slightly exceeded Nu 100 mn. However, this has been assessed as an accounting issue that can be rectified. The RMA did not find any evidence of preferential treatment in these cases.
A BDBL source stated that the loan amount has been disbursed strictly within the Nu 90 million limit, with no additional funds released. The bank does not consider this a finding, as no amount exceeding the approved limit has been disbursed.
A source at the RMA said a mitigating factor was that, when the ESP was initially open to all banks, lending activity was very limited and the scheme had nearly stalled. When BDBL was later given the mandate, it faced a constrained timeline to process thousands of applications and loans. As a result, some minor errors were considered understandable.
It had been observed that moves like making payment only to suppliers was useful, and the RMA has recommended that the BDBL step up its monitoring of these projects on the ground, which are mainly at the construction phase using teams that include engineers. The team should track the milestones, delays and any cost overruns.
The RMA has sent its report to the ACC, and will also send a copy to the BDBL Board which will fix any accountability.
The BDBL had received 3,969 applications worth Nu 11.5 billion (bn) of which it approved 2,202 loan applications worth Nu 3.1 bn.
The RMA review came after the ACC found lapses in three ESP loans of the four it investigated in findings it made public on 20th December 2025. While the ACC did not find corruption in the three cases and hence no grounds for criminal prosecution, but it said it found serious administrative lapses in the interpretation, application, and enforcement of the ESP Guidelines by certain FIs, particularly in relation to eligibility criteria, loan conversion practices, committee governance, and post disbursement monitoring and supervision in three of the four projects.
The RMA ensured that the BDBL, T-Bank and BIL either made recoveries, stopped payments or converted certain loans into commercial loans with no ESP given in the three cases.
The ACC had requested the RMA to conduct a comprehensive assessment of all loans approved under the medium scale ESP category to ascertain compliance with the ESP Guidelines in December, giving a three-month period towards the end of March 2026. The RMA had to seek an extension till April to validate its findings.
The RMA team looked for certain things in its review.
One was to check if any ineligible projects were given ESP loans, another is if the disbursement was done before it was supposed to be done, and the third is if the key documentation requirements were met.
RMA Release
Meanwhile, the RMA issued a press release on its findings on Monday afternoon.
It said 149 applications for Nu. 7,531.66 million were received under the medium scale category. Of these, 112 applications were declined due to failure to meet guideline criteria, adverse credit records from the CIB, withdrawal by applicants, or because the proposals were not technically feasible or economically viable. The remaining approved 37 applications amounted to Nu. 1,913.19 million. The RMA did not review the 4 cases that were already investigated by the ACC.
Treatment of Interest During Gestation (IDG)
IDG is estimated by banks at the time of loan appraisal, assuming full disbursement of the sanctioned loan amount and full utilisation of the gestation period by the borrower. However, depending on the rate and level of actual disbursement, differences may arise between the estimated and actual IDG. For three loan accounts, factoring in the amount of IDG results in the total project cost exceeding the Nu. 100 million limit, by Nu. 2.82 million, Nu. 2.28 million and Nu. 1.61 million, each.
While the RMA’s Prudential Regulations 2024 only prescribes the treatment of IDG (whether to pay it during or at end of gestation, or whether to capitalise it), the valuation of project cost is governed by Section 8 of the Bhutan Accounting Standards (BAS), which explicitly states that IDG shall form part of the project cost. By excluding IDG, the bank deviated from the proper determination of project cost.
However, the principle of considering only the core investment value, i.e. excluding the IDG, was uniformly applied by the bank and no proposal was rejected because the project cost exceeded the threshold on account of the IDG.
The RMA has directed the bank to adjust the IDG so that the project cost remains within the Nu. 100 million ceiling. The bank will accordingly be deducting a portion of the IDG from future disbursements.
Credit Risks from Misaligned Loan Tenures
In two cases, the land lease period for the project will expire before the loan tenor matures. The land leases were for three and seven years respectively, against the loan tenor of 10 years.
Land leases are usually for short tenure and misalignment between the lease tenure and loan tenure are prevalent across the financial sector. This needs to be addressed at a financial sector-wide level. While the bank applied its business-as-usual approach for the appraisal, it should have enhanced diligence in these cases since the loans involve concessional ESP funds.
The liability for default will be entirely on the bank and the bank will have to fully refund the ESP loan to the government in the event of default, while continuing to pursue recovery from the borrowers.
Clerical Errors and Documentation Gaps
13 loan accounts had clerical errors and omissions such as the credit officer rounding off the approved loan amounts, inconsistencies in figures, and incomplete documentation affecting both working papers and executed legal documents. Documentation gaps relate to missing MOICE clearances in five businesses. These deficiencies tantamount to negligence and weaknesses in internal control and documentation processes.
The RMA directed the bank to close all documentation gaps including confirmation of key details such as loan amounts, repayment terms, interest rates, borrower information and security arrangements, correct the errors and maintain proper audit trails and version controls, by 30 April 2026.
Project Monitoring Gaps
Site inspections were predominantly limited to the stage of fund disbursement, with no evidence of periodic or ongoing inspections commensurate with the size, purpose, complexity, and risk profile of the projects. Inspections were conducted without an engineer. Furthermore, the bank does not have a comprehensive and standardized framework governing site inspections, monitoring protocols, and quality assurance mechanisms for projects under construction. This gap weakens oversight and increases the risk of project delays, cost overruns, and potential misuse or diversion of funds.
The RMA has directed the bank to constitute an independent inspection team with the relevant expertise by 31 May 2026 and ensure timely monitoring and field visits.
Approved but Undisbursed Funds
Loan for two accounts, amounting to Nu. 42.91 million and Nu. 53.00 million, respectively, were not disbursed at the time of the RMA’s review because the proponents were unable to furnish the required technical clearances. These loans have been subsequently cancelled by the bank during the RMA’s review.
Delays in starting the project result in funds remaining idle, undermining the objective of the ESP to provide timely financial support to eligible borrowers to stimulate economic activity. These funds could have been allocated to other immediate needs. The bank was directed to return the funds back to the ESP pool.
Case Requiring Recoup
Out of Nu.56.58 million that was approved for a project, Nu.5.82 million has been disbursed so far to facilitate the commencement of civil works. The proponent then informed BDBL that the original project site was technically unfeasible due to its susceptibility to flooding. A new proposal was submitted involving the relocation of the project and merger with another business unit engaged in a similar line of activity. As this represented a material deviation from the original proposal, the bank declined the proposal for relocation and merger, citing concerns that the revised arrangement would significantly alter the original project assumptions, appraisal parameters, and risk profile.
The proponent was already operatin” the’same business on lease from another entity. The ESP loan was taken to start the proponent’s own business in a different location, while the revised proposal was for a merger with the already existing entity wherein the proponent would hold 50% ownership.
The RMA has directed the bank to immediately cancel and recoup the loan.
Mitigating Considerations in the Determination of Sanctions
When the ESP Credit Lines were introduced in August 2024, the expectation was for all financial institutions to participate in the scheme. However, the entire ESP CCL window was centralised under the BDBL in December 2024 because of limited participation and high rejections by other financial institutions, predominance of proposals in the agriculture and livestock sector, and the need to provide dedicated, timebound manpower to support application processing. While the interest rate of 4% factored default risks which would have to be borne by the financial institutions, the requirement for the ESP funds to be ploughed back to the government may have still inhibited active participation and led to high rejection rates by the other financial institutions.
18 new recruits with no prior experience were onboarded and worked alongside bank officials. The BDBL received 3,969 applications for Nu.11,569.91 million, which had to be assessed within a timeline of around nine months, while attending to their regular, non-ESP related work. Against this background, it is reasonable to expect that existing weaknesses in the appraisal processes would have been amplified.
Regulatory Sanctions
However, the above mitigating considerations do not obviate the need to fix accountability. The BDBL Board of Directors is therefore directed to take appropriate administrative or disciplinary actions on all individuals responsible for the deficiencies and non-compliances identified in this report and submit the action taken to the RMA by 18 May 2026. In addition, a monetary penalty of Nu.1,702,699.64 is imposed on the BDBL for the non-compliances.
