With the government yet to respond to their earlier grievances, the private sector representatives proposed a host of solutions saying the economy is going through an unprecedented crisis
If the government and the central bank does not address the current liquidity crunch for another few months the whole economy is headed for a collapse with every citizen feeling the effects according to business leaders in the private sector.
With that message full on board, Private sector representatives at a meeting with financial institutions earlier this week said the government needs to understand the magnitude of the current economic situation which they failed to as yet.
“There is an economic crisis in the country, I don’t know if the government sees it, or anyone else sees it, but as a businessman, a citizen and head of this chamber I think this crisis needs to be solved,” Bhutan Chamber of Commerce and Industry (BCCI) president Tobgyal Dorji said Monday morning amidst a conference hall full with members of the private sector.
Since, it has been made clear that the commercial banks are suffering a severe liquidity crisis, the private sector among other issues, will request for external commercial borrowings (ECB) by banks, estimate their credit requirements in line with lending capacity of commercial banks, seek consideration on interest on business loans, propose banks to enhance export packaging credit (EPC), request central bank to consider usage of the foreign currency reserves and also relook into the foreign direct investment (FDI) policy to attract more external investors into the economy.
Financial Institutions clear doubts
Bankers admitted that there is a serious liquidity crunch in the sector which cannot be addressed neither by the huge corporate deposits since they are short-term nor the retail deposits that are scanty.
A businessman at the forum said “Lyonchhen said on TV that government hasn’t banned loans and said it’s the bank’s responsibility and decision. The blame has been passed from RMA to the government to the banks while the common people are affected”.
CEO of Bhutan National Bank Limited (BNBL) Kipchu Tshering said the economic growth achieved through credit from banks are proudly reflected in the government’s annual reports. “Now when there is a crisis within the banks, it’s not fair for the government to say that they have no hand in it and that it is the problem of central bank and commercial banks,” he added.
He said the growth rate and economic progress was achieved through huge lending by banks and the glory has been claimed by the government. He went on to say that the government can’t just avoid interfering when there is a problem and take credit when there is success. “If there is a problem, the government must solve it,” he said.
The BCCI secretary general Phub Tshering seconded the clarification and said it will be one of the vital points to be included in the proposal to the government. “The decision is theirs (government) but the banks and private sector needs to propose as one.”
DPNB CEO NK Arora said his bank continues to finance the builders whose loans has been sanctioned before construction began but is unable to lend to new clients and people who have started construction with their own capital and are now in need of loans for additional finance. “We will take up this issue to the RMA, if they can give some incentives to the banks for such category of persons as well”.
The BNBL CEO said RMA considered lifting the ban on vehicle loans if the government took fiscal measures such as increasing taxes but that didn’t happen in parliament so it’s still the same.
External Commercial Borrowings (ECB)
Commercial bank CEOs and some members of the private sector insisted the only way forward is to propose the government to consider ECB by the commercial banks or by any major individual borrower.
Talking to The Bhutanese the DPNB CEO said “the credit situation is alarming and is going to worsen and not improve for at least two to three years if it is not addressed because to meet the requirements of the private sector financing and to keep the economy going, we need at least an additional Nu 10bn every year”.
He said “We are short of liquidity. We have to borrow from outside through ECB as it will take time to enhance saving rates in the country”.
He also suggested as a long term measure, the government needs to take certain fiscal decisions such as “incentive of tax exemption on fixed deposits”.
Ugen Tsechup Dorji said banks should be allowed ECB, which the private sector, even if allowed, cannot avail of, because existing rules barred both government and banks from providing the guarantee.
BNBL CEO Kipchu Tshering said International Finance Corporation (IFC) agreed to provide credit to BNB, but it was turned down by the RMA.
Citing the example of Dungsam cement project which consumed Nu 2bn through local banks, the DPNB CEO said major government projects should be funded through ECB and not by local banks as it drains out liquidity with the banks which can actually be lent to the private sector.
The DPNB CEO and a few other businessmen suggested that the government look into the FDI policies as well. “A solution can be through FDI policy by only allowing local partner to borrow from local market,” he said.
Druk Holding and Investments (DHI) chief executive officer Karma Yonten also suggested that financial institutions pitch for ECB given the mounting pressure on the economic situation.
He went on to underscore NK Arora’s opinion on the ECB for huge government and DHI projects. “We have proposed that the government do the funding because the banks will be impacted”. He said the government could borrow the money from State Bank of India at 10% interest rate and lend it to DHI for financing the Dungsam project so that the local banks need not pump in the money and instead spend it on private sectors. “Not only will the financial sector will be stabilized but government will not have to pay the 10% as DHI was ready to pay it. Unfortunately there was no support from the government. I don’t know if they understand the magnitude of the problem faced by banks and private sector,” he concluded.
BCCI president Tobgyal Dorji said private individuals cannot indulge external borrowings and banks are trying to do it but they are being stopped. “We should move this motion to the government jointly as FIs and private sector or else there will be no economy tomorrow,” he said.
Lack of Export Packaging Credit hinder fruit exports
Representatives of exporters at the meeting expressed huge setbacks in business due to the lack of Export Packaging Credit from local banks. They said apple exports were ruined this season as there was no financial assistance at all from FIs.
An exporter at the meet said while there are just a handful of exporters in the country, substantial inflow of foreign currency has been created from the exports. “Some think that there was no market for apple this season, but the truth is, this time the banks refused to provide any assistance”.
Exporters are now worried about the orange season fearing it may meet the same fate.
BNBL CEO Kipchu Tshering said earlier the bank provided EPC to its clients but there has been cases, where exporters misused funds and failed to repay the advance payments to the bank. “The banks do not have very good experience with exporters when it comes to this. Some cases are pending for years with the court,” he said.
To this, an exporter said there are laws of the country to deal with defaulters. “All exporters shouldn’t be affected because of a few who fail to repay advance money. Industries are getting the EPC but we are not given any,” he argued.
The DPNB CEO said “we have the scheme for financing EPC but we do not have big share of the exporters as of now and there are no case of defaulters”.
He added that the bank is meeting the requirements of its existing clients but isn’t entertaining new ones.
The BCCI secretary general apologized to the exporters for their failed apple business this season citing lack of response from the government. “We have asked government that fund can be availed from BDBL and transferred to commercial banks to finance the exporters,” he said.
“If our farmers’ agricultural products are not sold by exporters, farmers will be affected. We will propose to the government for alternative source of financing,” he concluded.
The managing director of the Bhutan Development Bank Limited (BDBL) Pem Tshering said the bank will need corresponding banking with other international banks to provide EPC. He said the central bank doesn’t allow BDBL to obtain license for providing EPC.
He also said the government mandates BDBL to focus on providing credit to rural areas while the current case of EPC is of commercial lending.
Excessive corporate deposits doesn’t help enhance liquidity
Bankers at the meeting expressed a peculiar issue of their own apart from the ones cited by the private sector. They said billions is being deposited by the corporations with the banks which increases the level of liquidity. However, billions are withdrawn in a few months’ time by the corporations which makes it impossible for the banks to make use of the funds.
Although the level of deposits has increased by billions, it becomes an additional liability for the banks as they cannot make use of the funds such as lending out to clients but have to pay interest on these deposits.
The DPNB CEO said “corporate deposits placed with the banks for short term durations should not be taken into liquidity as it is likely to be withdrawn anytime”.
He said the bank needs to focus on the “permanent type of deposits” for credit purposes such as individual, retail deposits and fixed deposits of more than one year.
Though financial experts have said that one of the major causes of the current liquidity crunch was because of the overdependence on corporate deposits by the commercial banks, the DPNB CEO said it was “mainly fueled by financial assistance to the major government projects such as Dungsam and Dagachhu”.
The BNBL CEO said there has been too much economic growth in the last few years which also required huge credit from local banks to finance government projects. “The problem today is, savings in the country is very low and corporations are the only one to support us but they too have become short term depositors”.
BCCI president Tobgyal Dorji said all the issues will be compiled by the chamber and forwarded to the government by mid-October this year.
He said all of the governments “controls, restrictions, ad-hoc policies and regulations” are of no use if there isn’t an economy at all tomorrow. “They can impose rules and restrictions once the major economic crisis is solved by working together”.