A big portion of the COVID-19 economic shock was absorbed through the Royal Kidu that waived off the full loan interest payment from April to September 2020 and 50 percent interest waiver from October 2020 to March 2021.
Another major relief was also the deferment of loans until 30th June 2021 announced in the second phase of monetary measures.
With the interest waiver coming to an end in March and the loan deferment also coming to an end in another three months’ time, a natural question on many minds is what would happen next.
The Prime Minister in a recent letter to the financial institutions asked them to submit a plan to deal with the issue of loan repayments after June, lowering loan interest rates and providing more liquidity or loans to the market.
The Financial Institutions under the aegis of the Financial Institutions Association of Bhutan (FIAB) submitted a joint plan to the Royal Monetary Authority (RMA) which has done its own review and is further being submitted to the Ministry of Finance (MoF).
A reliable source on the condition of anonymity said that the FIAB has submitted that it is not in favour of deferring loans to everybody, but now instead wants to target only certain productive and affected sectors like hotels, tour operators, construction and manufacturing.
The banks are not in favour of giving deferrals to housing loans as rents are being paid and collected, or consumer loans which are tagged to salaries which is also being paid or vehicle loans etc.
The source said that the tourism industry has a genuine need for deferment as tourism is not happening due to COVID-19 and so they simply cannot pay. Similarly, the construction sector is facing issues due to shortage of labourers and materials and even manufacturing has been hit due to labour and export issues.
The banks in response to Lyonchhen’s request are also in favour of restructuring loans in these sectors by possibly extending their loan repayment period by some years.
The source said that banks are in favour of restructuring loans like tourism industry related loans so that they have a longer time to pay back.
On the issue of reduction of loan interest rates the source said the bankers said that with no spending avenues a lot of people are depositing money in the banks and banks already have to pay interest on it which is a high cost. So the FIs felt there is no scope to reduce loan interest rates and they instead would continue to give the 1% loan interest rebate for those who continue to pay on time.
On the issue of liquidity, the FIs discussed it and felt there is no barrier or restrictions to credit as long as the projects are good.
The mood among the FIs is to go for a targeted approach for those sectors that are badly hit and there seems to be little appetite to take any additional losses in 2021 given the poor collective performance in 2020.
The Finance Minister Lyonpo Namgay Tshering said that the government is yet to decide on strategy going forward from June 2021.
He said that the government discussed with the FIs that in the post COVID time people must not be bogged down in paying loans and the FIs have to come up with a strategy to protect the financial health of the borrowers. FIs have been asked to work out those strategies.
Lyonpo said the FIAB has submitted possible interventions to the RMA which after thorough scrutiny has submitted to the government for directives and the government is yet to deliberate on this as there is still time until June.
Lyonpo elaborating on the letter sent by Lyonchhen to the FIs said Lyonchhen’s direction to the FIs is firstly on how loans can be made accessible. The minister said the banks have adequate liquidity but there is a lack of investment in the economy.
“Lyonchhen’s letter clearly states how best we can link up and build a better relationship between the FIs and the borrowers and what are the major drawback for the borrowers in terms of accessing financing from the banks,” said Lyonpo.
He said that the second issue in the letter is about the interest rate and how best the banks can look into it. Lyonpo said if the interest rate is quite expensive for the borrowers then what could be strategies that the FIs can think of in terms of having a more favorable lending rate or terms for the borrowers.
Lyonpo said that third point in the letter is once all the fiscal and monetary measures end in the post COVID time then how will FIs handle repayment of loans with all these deferred loans.
“Are they going to extend the loan repayment tenure and how are the financial institutions going to manage,” said Lyonpo.
He said this is because the government is concerned with the financial position of the private sector.
Lyonpo said that currently the Bhutanese economy has not experienced the shocks it could have due to the rescue in the form of His Majesty’s Kidu loan interest waiver.
The minister said in addition to the Kidu interest waiver the loan deferral and the fiscal measures like deferring tax collection also helped.
On the banks proposal to give loan deferral to only certain sectors the minister said that while the banks may propose that way, this is not a decision only for the banks to take.
Lyonpo said a decision is yet to be made and they need to have a tri-party meeting between FIs, RMA and the government.
Lyonpo said the government needs to draw a better synergy and as of now government will remain guided by the RMA and FIs as they know their position best.
Lyonpo said the current high liquidity in the banks means that there is a stagnation in the economy as the banks are not able to lend out because the private sector is not able to absorb the loans due to lack of investment opportunities for now.