Banks are going after pre-COVID NPL loans

The Prime Minister’s Office on 30th June 2021 announced a loan deferral till June 2022 for all loans sanctioned as of June 30, 2020.

The popular assumption was that this means a blanket loan deferral for all loans until June 2022.

However, a new section was included in the phase three of monetary measures where it says, “Notwithstanding the above provision, the Financial Service Providers may negotiate with the borrowers for revival/rehabilitation or foreclosure of non-performing loans.”

This section is a reflection of the ground reality where all Financial Institutions (FIs) are pursuing pre-COVID bad loans for repayment.

A member of the Financial Institutions Association of Bhutan (FIAB) said that the understanding of the FIs is that the loan deferral is not applicable for those whose loans were already in NPL prior to COVID-19 which is by the 31st of March 2020.

The definition of NPL is any loan that is overdue beyond 90 days and so if you already had an NPL before 31st March 2020 then your FIs will eventually get in touch with you for payment.

However, a credit officer with a major bank said that this period is the best opportunity for pre-COVID NPL loans to get their NPLs fixed as unlike in earlier periods the banks can restructure the NPLs and give them more time to pay for genuine cases or projects which are viable down the line.

This is the result of the National High Level NPL Committee under the Chairmanship of the Finance Minister Lyonpo Namgay Tshering.

The RMA had said that while the prospects for a turn-around of pre COVID-19 NPLs may have further worsened as a result of the pandemic, added risks are foreseen in the form of new and increased NPLs.

It said that considering the urgency of addressing the non-performing loans, this National High Level NPL Committee was formed.

This committee is supported by two committees below it.

The first one is comprised by the legal head of the various FIs which gathers the information and evaluates it and sends it to the next committee which is the Committee of FIs’ CEOs who take most of the decisions and for matters it cannot resolve it is then passed on to the high level committee.

A banker said that the committee has had two phases of meetings so far. In the first phase the committees tackled the top 30 NPLs and in the second phase the next 20 were tackled.

The banker clarified that these top 50 NPLs are not necessarily the big clients who have not paid but it is mainly those NPLs where chances of repayment are very slim, where there is no collateral or no adequate collateral, where a person is dead, in prison or even absconding the country.

The legal committee first gathered the information and looked at it and then passed it onto the CEOs committee which resolved issues but passed on certain matters to the high level committee.

It was here where the NPL Asset transfer framework was created where eligible NPLs will be temporarily parked for 3 years by the financial institutions in this account within each FI with subsequent freezing of interest to provide relief to borrowers and decongest the books of the financial institutions for new credit flow in the economy.

A banker said that many people have misunderstood this to mean that after three years they do not have to pay, but what it actually means is that the FIs have three years within which to recover the money either through restructuring of genuine and viable cases or foreclosing the loans and sending it to court to recover the collateral.

The banker said that even now the FIs can purse pre-COVID-19 recovery cases in court. A minor issue had cropped up when some courts had decline to accept pre-COVID-19 NPL cases citing the loan deferral.

The RMA and the government is in active talks with the Supreme Court to remove this misunderstanding and facilitate a faster legal process for these cases. A banker said that some positive confirmation may come soon.

The auction of seized properties by the FIs had been stopped for a while by the RMA due to the pandemic, however, the FIs feel that it is pointless to go after NPLs if the collateral property cannot be auctioned.

Here the FIs are expecting the RMA to come up with some SOPs for such auction or sale of seized property soon as a part of the recovery of pre-COVID NPL loans.

Many bankers that the paper talked to who all requested anonymity said that the RMA is concerned with the NPLs and has asked the banks to work to reduce them.

As of March 2021 data from RMA shows an NPL of Nu 24.75 bn against a total credit of Nu 169.80 bn which comes to a NPL of 14.58%.

All of the above are pre-COVID-19 NPLs. The fear is that if the above is not addressed then the actual NPL in the future may be far worse once the deferral is lifted given that all the loans have been put on a freeze since last year and up to next year.