Bhutan faces domestic credit crisis as banks freeze loans

Financial Institutions say they may not be able to issue any new loans for months and even years under RMA’s latest liquidity or borrowing restrictions. This comes in the backdrop of the already existing housing and transport loan restrictions.

Bhutan’s Financial Institutions are heading for a deep freeze as a new set of measures by the Royal Monetary Authority (RMA) aimed at improving the liquidity of banks have virtually stopped issuance of almost all loans by banks.

What makes this loan freeze worse is that it comes on the back of existing restrictions on housing and car loans which was meant to address rupee crisis. There is increasing panic both among loan seekers unable to get loans and financial institutions unable to lend even basic loans under the latest restrictions.

The new RMA restrictions issued through a circular on 30 March 2010 by RMA dramatically increased credit to deposit ratios and also risk weightages which in short means that banks in complying with these measures have little or no cash to lend for the foreseeable future.

“Bhutanese financial institutions since early 2000 had overleveraged and over exposed their loans which now has to be rectified,” said RMA Deputy Governor Eden Dema explaining the move.

Loan payments by banks to hundreds of customers whose non rupee related loans have already been approved have been put on hold. In addition to this most banks have stopped accepting any new loan applications.

“With this new situation of banks not being able to lend, economic growth will stop, the private sector will be hit and even the government’s developmental activities will be affected,” said Bhutan National Bank (BNB) MD Kipchu Tshering. BNB itself has put on hold the issuance of Nu 1 billion worth of loans even to approved customers in its effort to match the new norms.

Tashi-Bank’s (T-Bank) Head of Credit Department, Karma Shacha said the bank has no choice but to place a stop on all the loans given the new conditions.

The Bank of Bhutan, MD Passang Tshering said,” We are revisiting our liquidity position and so presently in our case we  are not sanctioning fresh loans except for maybe small consumer loans. This is definitely a concern for all banks.”

Bhutan Development Bank Limited (BDBL) has also said that the only way to match RMA’s restrictions is to either increase deposits or stop giving credit.

The financial institutions are planning to meet soon to discuss ways to deal with the latest credit crunch and perhaps also try and convince RMA to change its mind on its notifications.

A financial manager said, “With the latest restrictive conditions set by RMA we may not be able to give loans for months or even a couple of years.”

The credit panic started after the RMA notification sent to the banks stating three main points.

One is that the Credit Deposit Ratio will have been brought down to 60% or less. This means that out of every Nu 100 with the banks, only  Nu 60 can be lent. Earlier there were no such restrictions. This is on top of the existing 30% that the banks keep aside as Cash Reserve Ratio and Statutory Liquidity Ratio with RMA itself.

If this was not bad enough the second credit crunching step is that Banks now have to significantly tighten their Capital Adequacy Ratio (CAR) belts. Capital Adequacy Ratio is the 10% minimum capital that the banks have to maintain against the loans given so that depositors are protected against liabilities.

The bad news for the banks here is that to calculate CAR, a key component required is risk weightage on loans. In short higher risk weightage on loans lowers the CAR which is not desirable for banks.

Earlier risk weightage was 100% across the board but now it has been increased significantly. The increase is 200% for loans whose overall loan portfolio exposure is from 10% to 20% and 300% for loans whose exposure is above 20% to 30%. This means that since most Bhutanese banks have high exposure to housing and car loans their CAR comes down under the new RMA norms meaning they need more capital to maintain their CAR further tightening credit flow.

The financial institutions have been given time till December 2012 to catch up with these new regulations after which a daily fine of Nu 5,000 a day is imposed and can also lead to the cancellation of the banks license.

The third point in the notification is that banks have been told not to lend to a particular sector above 30% of its total loan portfolio. This will also be a challenge for some banks as some of them have already exceeded this limit.

As of now not even a single financial institution can match all the above requirements with many doubting whether they can match it even by December 2012.

“If we have to meet the above figures, then all the banks might as well shut shop till December 2012 and beyond not issuing any kinds of loans,” said a FI manager.

BNBL’s credit to deposit ratio is around 90%, Bhutan Development Bank Limited is 190%, Druk PNB is 68.4% and BoB has also crossed the credit deposit ratio.

BDBL Deputy CEO Ugyen Dhendup said, “It will be quite difficult to comply with RMA’s guidelines as we got our banking license only in 2010. Loans requiring rupee transaction has been stopped but loans for rural development like loans given to earthquake victims cannot be stopped.”

On the CAR front most banks will find it difficult to maintain the minimum 10% limit once the RMA’s new risk weightage calculations are featured.

The Deputy chief executive officer of Druk PNB (DPNB), B.B Chauhan said, “We have no choice but to comply with what RMA says which will be difficult but we have been given time till December and by then we will have our capital base improved”.

The RMA’s move is seen by some financial institutions as an over-reaction.  “RMA had been criticized for not taking early action on the rupee crisis. This move by RMA is to ensure that they take early measures on any future liquidity problems. The problem here is that this new move comes in the wake of the rupee crisis and earlier restrictions on housing and car loans making the credit crunch worse,” said an economist.

However the Deputy Governor of RMA, Eden Dema has a different take on the issue. “These moves are basically to mitigate concentration of loan risk in particular sectors and also improve the liquidity of financial institutions,” said the deputy governor.

She clarified that the latest move is not related to the Rupee crisis as the rupee issue was a monetary policy issue. She said that recent moves on the liquidity issue is RMA exercising its prudential supervisory role as  the central bank.

She said that the banks cannot claim a liquidity crunch otherwise banks will have to stop operating.

“We monitor the health of banks for financial stability. Since there are some early potential symptoms of a liquidity problem we put in these measures before there is any problem. These measures will take care of all problems,” said Eden Dema.

RMA officials say that there are various ways for the banks to manage. One would be to increase interest rates and thus get more deposits; the other would be to issue more shares and also reduce dividend declaration and plough back more capital.

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  1. So, will I be wrong in saying that the housing bubble has already started to burst.

  2. Land prices should be coming down in 6 months time…. sanity will prevail!!!

  3. “Bhutanese financial institutions since early 2000 had overleveraged and over exposed their loans which now has to be rectified,” said RMA Deputy Governor Eden Dema explaining the move.

    What was she doing since 2000….handling projects……RMA waking up from long slumber …we need more qualified people at the RMA

  4. as predicted. but the fall out will be a lot less damaging because it has burst prematurely thanks to the rupee crisis. imagine if the dishing out of loans had continued in the same wild way for another 5 years and when the rupee crisis hit, there was also an oversupply of overpriced buildings with no takers. all the building owners would be defaulting on their loans and with one two many loans not being repaid the banks would also collapse.

    The banks have been dumb and the government has been dumb. In conclusion, for the past 5 years we have been led by Dumb and Dumber. In a sense, two wrongs did make a little bit of a right.

  5. we’re going from too much cash in the economy through too easy loans, to now having no money at all. But statistically, if we average it out, we’re just perfectly in the middle! 

  6. How can you say banks have over leveraged and over exposed? Over exposed to what? Just using jargons but not knowing what they are saying?

  7. I think the RMA needs to rehire Mr. Colm Lanigan who’s article on the present rupee crisis was published in Kuensel just about a week ago. Since the rupee crisis has hit Bhutan, what he has written has made the most sense and hence it won’t be a bad idea if he is appointed an adviser to the RMA until this crisis passes. 

    Right now, the people at RMA don’t seem to know what they are doing and if this uncertainty continues, it could have disastrous economic results for us.

  8. Keep your money safe, folks! The prices are going to hit the ceiling! Of course, the land and the building prices will come down collapsing! Don’t buy lands until everything settles down in a few years time!

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