A crisis that may go beyond the Rupee and Credit shortfall

While the current economic situation hasn’t shown any signs of abating, it could give birth to a much more severe financial predicament. With all the banking institutions closing their accounts for the year, banks are finding increased numbers of non-performing and defaulting loans.

Commercial banks have already alerted their customers to regularize their loan which means clients are expected to clear all their outstanding installments within the year. Failing to do so will result in banks initiating legal procedures against the defaulters.

Although, this is an annual routine followed by all banks, the situation this year entails reports of a large number of people unable to make regular payments on their loans leading to an alarming increase in non- performing loans (NPL) or bad loans.

Majority of the bad loans are attributed to the INR and liquidity crisis which continues to have a lot of adverse effect on businesses.

An Assessment Letter on Bhutan by the International Monetary Fund (IMF) released in September this year stated the net NPL have risen to 5.9% from 3.1% of total loans a year earlier.

The CEO of Bank of Bhutan Limited (BoBL), Passang Tshering said the “level of NPL has increased in comparison to the past.”

A senior BoBL official also said “the NPL percentage this year has gone up which is a serious cause of concern not only for the bank but the whole financial system and the economy. If such issues aren’t sorted out at the earliest with diligence, the private sector can be affected.”

Some bankers have already predicted that the increased level of NPL and liquidity crisis together may result in accumulation of non- performing assets (NPA).

CEO of Druk PNB (DPNB) N. K. Arora ruled out any impact of the current economic situation on the closure of all the loan accounts. “Most of our clients are closing their accounts without much difficulty,” he said.

“Certain accounts turn into NPLs every year. So either the customers will pay or bank will go for litigation. Let us see what happens after December 31 as the clients still have a week for recovery,” NK Arora said.

A financial expert working for one of the commercial banks said the bank sets aside certain amount of money every year as a provision to cover up for bad loans. However, if bad loans increase, the bank has to use money from its profits. “This will turn the profits of a bank into losses and if banks go into substantial loss because of increased NPL, it is a very serious concern as banks will go out of the market,” he explained.

The expert said the level of NPL is directly related to the loan portfolio of a financial institution. “When the loan base goes up the NPL will come down but since there is no loan base now, debts are going up”, he clarified.

He also said even if the bank forecloses or seize collaterals from the defaulters, the bank will have to eventually sell it in the market. However, with the current liquidity crisis, he said banks will not be able to auction the collaterals at prices that can recover the loans’ amount. He also pointed out that land value as of late has decreased because there aren’t any buyers since loans cannot be availed to buy land and hence such collaterals turn into non- performing assets (NPA).

He said, with no financial assistance at all from the banks there will be a dearth of buyers despite a decrease in the land value.

However, the CEO of Bhutan National Bank Limited (BNBL) Kipchu Tshering said the bank can always find a buyer although at a lower price.

He also said the level of NPL with BNBL can only be determined after December 31, 2012.

The DPNB CEO said “when the bank goes for sale of an asset, it fetches at least the principal amount and that is the reason we have margins while providing loans.”

The BoBL CEO also said the bank has been more careful at the time of sanctioning loans to prevent bad debts in future. “We also put in the recovery effort and that is all what we can do,” he said.

It’s been almost a year ever since bank loans especially housing and vehicle loans were stopped after the central bank put in place new restrictions on banks on April 2012, leading to a virtual credit freeze. The sudden freeze on credit was largely attributed to the Indian Rupee (INR) shortfall as it was perceived that the excessive credit had fueled the shortfall.

All the while, the percentage of Non-Performing Assets (NPA) with commercial banks in the country has suffered a rapid increase. While there is no question of lending, some banks have difficulty even making huge payments to their clients through the current accounts.

Several hundred personal home builders and contractors across the country, especially in Thimphu are faced with severe issues with regard to monthly payments on the loans they had taken earlier because the incomplete buildings are not ready to yield rental income which forces them to default on their payments.

Contractors and experts fear that such a situation can trigger a real-estate crisis too.

In the meantime, the automobile industry is among the worst hit. While some have resorted to cost cutting measures and mass layoffs a few are on the verge of closing down businesses. The ban on car imports haven’t been lifted ever since it was imposed in March 2012.

A senior banker in the capital said “If the financial habits of the people don’t improve, the country cannot come out of the financial crisis. Unlike people in developed countries who save money and spend later, people in Bhutan first take loans which are mostly misused.”

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