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Banks in favour of extending loan deferment

But not for interest waiver

As the three-month loan deferment is coming to an end by June 2020, Bhutan’s Financial Institutions largely favour extending the Equated Monthly Installment (EMI) deferment by another three months at least, given the current bleak economic situation due to COVID-19.

The Financial Institutions Association of Bhutan (FIAB) is expected to submit a joint proposal from the FIs to defer the loan or EMI payments to RMA by 16th June.

The general feeling among the FIs is that given the condition of the economy it would be harmful for both the loan clients and the banks to not have deferral. It would be bad for the loan clients as many of them do not have the income to pay the loans and it would worsen their condition.

Their inability to pay the EMIs at this juncture would mean a huge spike in Non Performing Loans for the banks which in turn would be negative for the banks.

NPLs are bad for banks as a portion of their annual profits have to be provisioned against the NPL which means no dividends and large NPLs can also impact the very stability of the banks.

The BoB CEO Dorji Kadin said that the FIs among themselves broadly agree on the need for loan deferment so that it benefits both the customers and the banks. He said the banks would be doing a detailed study of the scenario on the issue.

Druk PNB CEO Sumesh Kumar said that the FIs are analyzing across the board and there is a feeling that the situation is not very conducive after the end of two and a half months and so support must be given to the industries and entrepreneurs. He said that it is a force majeure (beyond anyone’s control) situation and so relief must be given.

However, while there is a consensus on giving loan deferment the discussion among the FIs is on whether to give it to all sectors like in the first instance or only to certain badly hit sectors like tourism and others.

The other aspect of the discussion is also the impact of the loan deferment on some FIs who may suffer in terms of cash flow.

And so here the discussions are on certain measures that the RMA could take in this regard.

Some of the ideas is for the RMA to reduce the Cash Reserve Ratio of 7 percent (already reduced from 10 percent) and the Statutory Liquidity Ratio of 20 percent for banks and 10 percent for non-bank FIs.

The CRR of a bank is the 10 percent of its total deposits that it has to deposit with RMA and so normally banks cannot lend out or earn money on it.

SLR is around 20 percent of the deposit or liability of the banks minus the capital value of the banks kept with RMA and, here again, they normally cannot earn interest unless they can buy T-Bills.

If these are relaxed, then it would free up more cash for the banks to lend improving their liquidity.

The RMA, however, may have a different view on this.

Another issue that the banks are looking at is the fact that courts after COVID-19 have stopped accepting recovery cases and there is a currently a mutual freeze on auctions of property by banks due to the concern that it would not fetch a good price at this time.

The banks also favour a deferment of another three months and not six months since they want to see how the situation evolves.

The RICBL CEO and head of the FIAB, Karma said that the economy is going through a tough time and the FIs cannot sit in one corner.

He said that the FIAB is currently discussing the proposal of a loan deferment and the final recommendations would be put up to the RMA on Tuesday.

The RMA is also collecting date from the FIs to see the impact of the deferral.

While the loan deferral maybe under active consideration both for the banks and RMA, what is not on the table at the moment is another round of interest waiver.

The FIAB head said that another interest waiver is not sustainable for the banks.

A senior RMA official said that from the month of July the FIs will go into the red and so while the private sector will always demand for a waiver it is important to now consider the stability of the FIs.

The RMA official said that the rescue and relief had already been given and it is now time for rehabilitation which cannot come at the cost of the FIs.

The official said a cement or any other company can fail but a bank cannot be allowed to fail as people need to have confidence in the banks to keep their money there.

On the idea of CRR and SLR reduction the RMA official said there are other ways to increase cash flow which would include improving recovery.

As per the latest data for April 2020 there are 139,096 loan accounts which got the interest waiver and loan deferral including 18,750 NPL accounts.

His Majesty in an address to the nation on 10th April commended the RMA and the FIs for considering the deferment of loan repayments and waiving interest payments for three months from April to June 2020 in light of the economic uncertainties around COVID-19.

The interest waiver was granted on the command of His Majesty with the government sharing 50 percent of the burden under the National Resilience Fund.

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  1. After using this three long months(July, Aug, Sept) loan deferment relief, can loaners, in their discretion, repay EMI w.e.f October?

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