The Bhutanese Leading the way.
Financial Institutions feel that the tough conditions would restrict credit growth and hit the economy
The Financial Institutions Association of Bhutan (FIAB) which met on 18th July to discuss the Royal Monetary Authority (RMA) draft guidelines reopening housing, vehicle and consumer loans has decided to ask the RMA to do away the loan caps and other restrictions in the draft guidelines.
The RMA had posted the draft guidelines on 11th July 2014 for public feedback on its website.
Housing loan cap too low
The FIAB members who comprise of all Financial Institutions in Bhutan welcome the opening up of loans but feel that it would not have much impact if the loans caps especially on housing loans are not removed.
The RMA draft proposes a cap of Nu 20 mn for commercial housing loans meant for sale or rent and another cap of just Nu 3 mn for home loans meant for residential purposes. In the case of home loans one member of a family unit is eligible once in a lifetime.
A FIAB member said, “The Nu 20 mn loans do not serve any purpose as most commercial housing projects cross the Nu 20 mn cap with it being in the range of Nu 30 mn to Nu 50 mn. Till now there has been no loan cap but with a loan cap the public will suffer.”
He said that the immediate impact would be that big clients would not be able to construct large buildings which eventually would lead to a housing shortage within the next two to three years.
He said the absence of big buildings would shorten both the supply of apartments for sale and also rental apartments and also clash with the Thimphu Thromdes policy of building vertical to save space in urban areas.
A banker said that as long as there was income or a source of revenue from the building that could assure repayment then it should be fine and there should be no restrictions.
According to the FIAB even the Nu 3 mn cap on home loans was too low and what made it worse was that it was a ‘once in a lifetime loan’ applicable to one member per family only.
The FIAB feels that even the cap on home loans is also too low as the cost of constructing a basic home is more than Nu 3 mn with even apartments going for Nu 3.5 mn plus. They also feel that the once in a lifetime cap should also be removed.
The RMA guideline states that the repayment capacity of the individual should be such that 50 percent of the monthly income of a person should be able to pay of the home loan interest.
Bankers here feel that this would ensure that only the rich with high salaries would be able to take home loans and it would restrict even stable clients like civil servants.
Equity in cash problem for housing loans
According to the RMA draft guidelines which was already largely being practiced by banks, for commercial housing loans 40 percent of the project cost had to be provided by the builder with the bank giving the remaining 60 percent as loan. In the case of home loans the ratio is 30 percent to be provided by the builder with 70 percent loan from the bank.
However, FIAB members feel that the problem comes in with RMA’s requirement that this equity portion has to be given as cash by the borrower and cannot be borrowed from banks.
“Earlier most clients to meet the 30 or 40 percent equity took personal loans and paid it but RMA’s requirement that the equity money cannot be borrowed will result in many people not being able to avail loans in the first place as there is not much savings in the economy,” said a banker.
The FIAB wants this regulation to be removed as they feel it will constrain credit growth in a huge manner as people would not be able to fund the equity component.
Unhappy with the cap on consumer loans
The FIAB will also request the RMA to remove the Nu 500,000 cap put on consumer loans. Bankers argue that this will also hit all other categories of loans as industrialists, businessmen and others to finance the equity component of their project loans, construction loans etc took consumer or personal loans.
For example for a 10 mn food processing project, the borrower may have to come with 30 % or Nu 3 mn as his or her own equity with the bank funding only Nu 7 mn of 70 percent. In the past the practice was for the person to borrow this Nu 3 mn as a personal loan.
However, with a Nu 500,000 cap this avenue for people to take even larger credit will be effectively closed.
A banker said that given the economic conditions even major business houses would have difficulty in coming up with equity of Nu 40 to 50 mn on their own which was why the consumer loans had become even more vital.
Only one loan from one collateral asset for housing loans
The RMA draft guideline states that commercial housing loans will be provided by only one Financial Institution and multiple raising of loans on the same collateral is not permitted.
The FIAB feels that this will create another bottle neck in the credit sector as it will tie up even big and promising collateral assets in a single loan.
“If one has excess security in the form of a good collateral asset like a big building or prime land then one should be allowed to take multiple loans on the same collateral as was being done in the past,” said a banker.
A FIAB member said what will happen is that even if a big collateral worth Nu 50 mn is tied up in a Nu 1mn loan then the owner cannot use any other part of his asset to take other loans until the Nu 1 mn is paid off in full.
“Even if the Nu 1 mn loan after years of interest payment comes down to Nu 100,000 loan the owner still won’t be able to free his or her asset to take other loans,” said the member.
Five year vehicle loans
The RMA guideline says that vehicle loans all must have a maximum 5 year period. FIAB members feel that this would discourage and disqualify many clients to take vehicle loans as a shorter time period would mean bigger monthly interest payments.
Currently some banks provide up to seven years loan for third country vehicles that are imported from outside.
FIAB warns of impact of new regulations on economy
The FIAB concluded that if the new draft regulations are not improved and changed in line with their recommendations than it would severely impact the economy as a whole.
FIAB members point out that all the above issues in the draft regulations would be as good as not allowing credit in the economy.
They feel that in the housing sector people will not build enough and in spite of the current surplus there would be a severe shortage in the near future.
FIAB also pointed out that the industrial sector would suffer as projects requiring large loans would not be able to materialize.
It would also not be able to give out smaller loans effectively affecting ordinary people.
Bankers said that the very health of the financial sector should be compromised as banks would keep collecting deposits with no way to lend it out and earn interest.
On rupee imports and the bank’s exposure problem
When the RMA shut down credit in 2012 of the two main reasons, one was to reduce rupee imports, and the other was that banks were getting over exposed to sectors like housing and vehicle loans.
A Banker with the FIAB said that controlling the rupee problem by ‘attacking’ the banks safety norms did not make sense. He said that the two were completely different ball games as banking norms were meant to ensure safe and reliable credit. He said the RMA’s job was to look at the macro prudential norms and not try to micro manage issues. He also pointed out that the rupee issue had more to do with the government’s fiscal policies and expenditure.
On the issue of exposure FIAB members said that already tools like Capital Adequacy Ratio and Risk Weightage Systems put in place ensured that banks have enough capital to give loans with minimal risk to them.
The FIAB will be meeting again on the 30th July to finalize and present its views to the RMA on the draft guidelines.
