The profession of a money lender is well epitomized in Shakespeare’s Merchant of Venice by Shylock, who demands a pound of flesh from Antonio who had defaulted on a loan. In modern times, the image has fallen not on big banks but on informal lenders.
In Bhutan, the practice of mortgaging precious stones or handing over live stock for loans at very high interest rates has always survived in rural pockets and among high-profile city gamblers. Here, small time borrowers are exploited aggressively with non-transparent practices. The Royal Monetary Authority (RMA), having taken note of the situation has decided to protect the interest of what is called the ‘micro-credit clients’ from abusive lending practices.
RMA, through a recent notification, has asked all unauthorized money lenders to register with the Central Bank in an attempt to provide clients with accurate, comparable, and transparent information on lending and borrowing.
“Based on the practices they follow we may or may not allow them to carry out the business,” said Eden Dema, head of the Financial Institutions Supervision Division (FISD) of the RMA,
According to her, not all, but some of them take advantage of naïve borrowers and the central bank must interfere to bring all lenders under their surveillance in the interest of the borrowers.
What Now:
Many informal money lenders charge an annual interest rate of about 80% while bank rates go up to 16%
What Next:
All unauthorized money lenders will have to register with the RMA which will monitor all transactions where the annual interest rates are about 60%
She said that practices prevailed when borrowers were allowed loans at exorbitant rates and were also advised by the apparently wise lenders to create a habit of saving whereby the lenders already would back a part of the money before it is lent out.
Sonam is a recent graduate. On his graduation, his father gifted him a new Chevrolet (UVA) car worth around half-a-million ngultrum. His desire to start a private business saw Sonam, approach various banks for a loan but in vain, for he couldn’t offer proper ‘means of repayment’ on which the bankers insisted.
A week later he saw himself approach Ap Tsagay (name changed), a private money lender at Semtokha. Ap Tsagay was seemingly interested in the arrangement to loan out Nu 150,000 to Sonam. The deal, Sonam would be required to repay the amount within six months plus an interest of some 7% per month.
Sonam walked out of Ap Tsagay’s house with the money while his brand new car lay sheltered at Ap Tsagay’s compound among cars of other lenders.
“I don’t know what will happen when my parents come to know about this,” said Sonam who added that he still hasn’t figured out where to invest the money.
According to the agreement, Sonam would have to repay an amount of Nu 230,000 at the end of six months, which includes an interest of Nu 10,500 for a principle of Nu 25,000 a month. The interest rate here is about 84% an annum while commercial banks lend money at interest rates between 10% to 16% for a year.
“We will supervise the lending and borrowing processes where interest rates are above 5% a month or about 60% an annum,” said Eden Dema adding that individuals, entities, or groups of people currently engaged in providing loans must register with the RMA
Further, Article 2 of the Financial Institutions (FI) Act states that no one shall engage in any financial services without a license to operate, in accordance with the requirements of the financial institutions act 1992.
However, Eden Dema said that the regulation will not be as formal as the Central Bank implements for financial institutions as it is just done to bring lenders under the surveillance of the Central Bank.
She said adding that the money lenders were not required to have licenses but must register themselves and provide prudent opportunities for the borrowers.
“Looking at the terms of their lending practice, they may or may not be allowed to operate,” She said.
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