This maybe one thing that cannot be blamed on COVID-19 but is a core problem in the heart of Bhutan’s Financial System that has been growing over the years, and is now big and serious enough to threaten the very stability of the entire Financial System, if something is not done.
Bhutan’s Non Performing Loans which have been building up over the years has now reached a new high of around 22 percent as of June 2020. With around Nu 153 billion (bn) lent out by Financial Institutions (FIs) this around 22 percent NPL is around Nu 33 bn.
To put it in perspective the NPL was already at a high of 17 percent between 2019 and early 2020 but it went up dramatically after that to around 22 percent in the following months.
Previously it was 10.43 percent (12.54 bn) in December 2018, 7.98 percent (8.25 bn) in December 2017, 6.48 percent (5.73 bn) in December 2016 and 6.03 percent (4.51 bn) in December 2015.
The Royal Monetary Authority (RMA) is yet to officially publish the NPL figures for 2019 or the more recent 22 percent NPL figure.
While all FIs are hit the two worst hit FIs are RICBL and Bhutan Development Bank.
While the NPL problem is largely from before COVID-19 the urgency now is that with COVID-19 putting a freeze on the economy this NPL is set to get worse and so there is a push to do something before it gets out of hand.
The Prime Minister’s Office in the phase 2 relief measures announcement made a two-line announcement saying, “The government and the RMA will conduct an in-depth assessment of NPLs from July 2020 to facilitate rehabilitation and/or foreclosure of non-performing loans.”
For now, important time has been bought in loans being deferred first for 3 months from April to June 2020 and then for 12 months from July 2020 to June 2021. This means that FIs have time until June 2021 to work something out before being forced to move on the NPLs.
The Finance Minister Namgay Tshering said that the government will be instituting a high level committee chaired by the Prime Minister with members like the RMA Governor, Finance Minister, Finance Secretary, Head of the Financial Institutions Association of Bhutan (FIAB) and a Supreme Court Judge.
The committee would be in essence bringing the Executive, Judiciary, Central Bank and FIs on the same platform to try and solve an issue where each of the above institutions have a role to play.
This committee would be supported by a technical committee that will submit the issues, ground realities and possible solutions. Currently it is not clear on who will be the members of such a committee.
The overall approach seems to be to try and give more time to genuine defaulters who can be rescued while on the other hand a faster judicial processing of wilful defaulters.
An added element that the government does not want to see auctioned properties going into a few ‘rich hands’ as they fear this will increase the wealth gap.
What the FIs want
The FIAB has been the main lead on the issue of NPL’s for a while with even the former FIAB head and former head of Bhutan National Bank (BNB) Kipchu Tshering taking up the issue with the RMA.
A few months ago while discussions were going on between the FIAB and the RMA on the first round of relief measures the FIAB also submitted the issue of growing NPLs and what can be collectively done about it to RMA.
The RMA on its part initiated discussions on the issue with the acting Chief Justice of the Supreme Court and the National Land Commission.
The FIAB also met with the acting CJ on the issue.
A banker said the judiciary is important as NPL cases ultimately go there and NLC was in the picture given that land is the main asset which is mortgaged with banks.
Then a committee was formed headed by the Legal Counsel of the RMA and made up of the legal heads of all the FIs to study the issue and come up with recommendations.
A banker said that all the committee members have come up with a list of their top 20 NPL defaulters for each FI who comprise a chunk of the NPL. The committee is looking into the genuine cases who due to the business cycle or certain regulatory issues defaulted and if they can be rehabilitated or revived to come out of the NPL and the legal aspects for those who are deliberately and wilfully defaulting. The banker said that for the genuine cases the NPL accounts could be given the option of increasing the loan period installments so that the repayment amount becomes lesser per month to enable the person to pay.
Diagnostic studies will be done on this and a banker said that it should not be confused with a waiver.
However, a key demand of the FIAB is for the judiciary to increase the number of commercial benches which can handle and expedite cases.
The worry within the FIs is differing judgments on similar cases and sometimes erratic ones which they feel can impact recovery of NPLs.
The code speak here is also that FIs want judges or courts that can better understand financial issues better.
Another banker pointed out that even if a NPL client wants to give up his or her property to the bank it has to go through a long legal process where the NPL interest amount and fines keep increasing.
The NLC is being talked to as certain FIs are sitting on a lot of land which are not worth the value of the NPLs.
The banker said that the hope of a couple of FIs is that if the Prime Minister, as he himself indicated, can have the government take over these properties against the loan.
The NLC is also in the picture to prevent multiple loans being taken on the same property but this is largely understood to be addressed with online systems.
A major worry for the FIs is that while their NPLs in December 2019 was bad enough it effectively doubled by the end of March and April 2020.
FIs are also looking at cooperating in terms of if one client has an NPL in two FIs and then if the collateral in one is not enough the FI with the excess collateral of the same client could help.
A discussion among the FIs is also for an Asset Management Company which could buy the bad assets or loans from the FIs enabling the FIs to have good financial figures.
However, this would require legislation and also questions on how this company can come up with the funds in the first place to buy the bad loans or assets. Another issue is the FIs would not be willing to take a big discount on their bad loans as shareholders would not permit this.
A proposal from some FIs is that the government form this Company and take over the bad loans. The company could be an interim measure and operate for a fixed number of years.
An Assets Management Company would also require a neutral Valuations Firm to fix the value of such assets. A banker said that there is some talk of some Bhutanese starting such a valuation firm.
The FIAB Head and RICBL CEO Karma said that NPL is an issue that has been there even before COVID-19 and it is the elephant in the room that needs to be cleaned up with a level of urgency.
He said there could be viable NPLs which can be restructured and those that cannot.
He said an important issue is to see if any eventual decisions on NPL will have the force of law and is also legally acceptable.
Meanwhile, the Finance Minister Namgay Tshering explained the role of the government on the issue of NPLs.
He said, “Our role is to see how the government can help the RMA and the FIs to solve the issue of NPLs. Until now there has been no government intervention on this issue.”
He said that if the NPL issue is resolved it will help resolve the cash flow. He said that the nature of NPLs needs to be studied along with why people have defaulted on NPLs and on if it is due to lack of financial discipline or their business not doing well.
Lyonpo pointed out that as people start to default the NPL only gets bigger with more interest being added. The minister said that the most acceptable way to resolve the issue must be looked into.
Lyonpo said that in genuine cases a middle path could be sought where the government can also step in and help FIs with fiscal measures like on CIT and BIT taxes, 3 percent property transfer.
The Finance Minister said that the international literature has shown that a situation like COVID-19 can lead to the widening of the gap between the rich and the poor.
He said some people have got low interest loans now and can import and carry on their business while others would not be in a position to borrow or do business.
He also said that this is a time when a lot of distressed assets come in the market at a time when land prices are coming down. Here the minister said that the government could look at acquiring these assets and then sell it back to the people in an equitable manner at a reasonable price instead of a few rich people getting all the assets.
The minister said that a rich man could buy the distressed assets and then sell it at double the cost a couple of years later.
He said the cabinet has not taken a final decision on this but the Prime Minister has already indicated this.
NPL’s are primarily due to a mixture of factors. The first is a credit boom in recent years where banks lent out huge amounts of money at discounted interest rates and it now appears that proper due diligence was not done in all cases.
Case in point is the high NPL rates in Service and Tourism loans where the bulk of the clients are Hotels that are already saturated.
The second reason is that the year 2018 saw a very long transition process between two governments and as a result a lot of activities came to a freeze and this particularly hit the contractors with the impact continuing into 2019 as well. Contractors have large over draft accounts with FIs and many of these went into NPL.
There are also factors at play like a slowdown in the Indian economy which was visible from 2018 onwards and a slowdown there is normally replicated here.
The global economy also started slowing down from 2018 onwards which was another factor.