Banks face stormy waters ahead with rising deposits, minimal lending and most clients not opting for the rebate

‘Banks never lose,’ is a widely quoted saying in the financial and business world, but the going does not look good for Bhutan’s Financial Institutions as they are getting a deluge of savings deposits but are unable to lend out that money due to lack of demand for credit in a COVID frozen economy.

The result is that the main source of the bank’s income which is taking deposits at a lower rate and lending at a high rate is being hit.

A prominent banker, on the condition of anonymity, said that at this rate the profitability of all the banks will be hit this year and banks will be worse off. He said that 2021 will be another bad year for the banks in terms of revenue and profits.

The situation is so bad that banks which normally chase after big corporate deposits offering them the best rates possible are now negotiating with big depositors to lower their deposit rates.

Banks have excess liquidity or cash with them right now. A source said that BNB Bank itself has around Nu 7 bn in savings accounts while BoB had around Nu 10 bn in the savings accounts around two months ago. The situation is similar across FIs.

The other problem facing the banks is that the vast majority of clients have not taken up the one percent loan rebate offer under which the loan interest rate is reduced by one percent if they continue to make monthly payments in addition to the 50 percent interest Kidu.

The banker said that in his bank around 30 percent of the loan clients initially opted for the scheme but they could not keep up payments and so now only 20 percent are paying their loan regularly.

This is a double blow which means that banks are not able to get income from the loans they already gave out apart form the 50 percent Kidu interest. The banker said while the Kidu interest has been very useful for the banks the deferment by RMA means they cannot collect the other 50 percent of the interest and also the principal.

From the available RMA data in March 2020 there was Nu 141.735 bn in deposits but this has shot up to Nu 164.372 bn by March 2021.

The interesting thing in this data set is that the biggest increase has been seen via retail deposits (individual customers) jumping from Nu 74.592 bn to Nu 97.576 bn which is a jump by around Nu 23 bn.

On the other hand, credit growth between March 2020 and March 2021 has slowed down to a trickle of 6.84% with Nu 158.928 bn in loans in March 2020 increasing to only Nu 169.802 bn. This is around a 11 bn jump only. This is compared to the 27.13% credit growth between March 2019 and March 2020. Nu 125.011 bn in loans in March 2019 jumped to Nu 158.928 bn by March 2020 before the pandemic hit. An increase of around Nu 29 bn.

The head of the Financial Institutions Association of Bhutan and RICBL CEO Karma said that banks cannot reject deposits being made to them. However, he said that banks also cannot have very expensive cost of funds and are so adjusting lower deposit rates.

He said that lending is down as there is not much economic activity which he said is a global phenomenon.

He said that the savings rate is up as people don’t have to pay loans and so are saving it up. He said people have also become more cautious about the future and financially more disciplined which is also why the savings rate are up.

Karma said that the lack of lending will impact profits of the FIs as this an opportunity foregone for investment and so FIs will have to make adjustments to ensure that the cost of funds is below the lending rate.

However, Karma said that this excess liquidity is a temporary phase.

A banker said that the liquidity issue will all depend on how much economic activities will be allowed in the coming months.

He said that if after the two doses and mass vaccinations there are relaxations and foreign labour is allowed then there will a sharp rise in demand for credit and so this liquidity will be sucked up but if this does not happen then the situation will continue.

With the vast majority of loan clients opting not to take the 1% rebate and pay their loans there is a worry among banks of what will happen after the deferral period is over in June 2022.

This was in fact one of the main worries expressed early on by the FIAB with the RMA even before the first round of monetary measures.

The banker said that the third phase of the monetary measures gave the space of five years more to restructure loans but this may not be enough for certain viable clients who may require more time.

He said the bank is not interested in owning a hotel or factory and  is more interested to see that they have the ability to pay back their loans.

However, the banker said that if the situation improves and if hotels can start servicing loans then there is no point in giving additional time.

The FIs basically have requested the RMA for more flexibility to restructure all types of viable loans.

The FIAB head, Karma said that if loans are not viable then there should be foreclosure actions but if a loan is viable they they should look to rehabilitate the borrower.

At the same time Karma said that if a hotel is solvent and can pay its loan within 20 years then there is no point extending it to 35 years.

Before the third round of monetary measures the banks had proposed to give deferments only to certain key affected sectors like hotels, manufacturing and others.

However, in a meeting between the FIAB and the Prime Minister Dasho (Dr) Lotay Tshering, Finance Minister Namgay Tshering and Economic Affairs Minister Loknath Sharma the PM had requested to give the deferral to all the sectors since everyone is affected.

The FIs had agreed to do so after the PM’s request.

Karma said that they will wait and see how COVID and its impact plays out till June 2022 when the deferment ends and then come up with proposals accordingly.

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