While other local banks grapple with rising NPLs
Among other sectors, the commercial banks in the country are one of the worst hit by the delay in the government’s budget approval. However, the country’s biggest bank, Bank of Bhutan Limited (BoBL) has seen a decrease in its bad loans or non-performing loans (NPL) level.
The impact of an increasing NPL is that high provision for NPL accounts has to be made, which basically reduces the profit of a bank. For example, if a loan of Nu. 5mn with an interest rate of 10% goes bad, the interest portion of Nu. 50, 000 per month (10%) shall not be recorded as an income of the bank, but shall be suspended under interest suspense account that falls under liabilities, which affects the profitability of the bank to an extent.
On the other hand, on the principle of Nu. 5mn, 100% bad loan provision has to be provided, equivalent to Nu. 5mn by debit to the profit & loss account of the Bank. This shall reduce the profit by Nu. 5mn.
Since the second Parliamentary elections were held in the current fiscal year (FY), the budget was approved just recently, earlier this month although the FY started months ago, on July 1.
While the government has released budget for select priority activities in the beginning of the FY to ensure government continuity such as the outstanding hydropower loan repayment and dispensing salary among others, government fund for other areas like the construction sectors, and outsourced works to the private sector hasn’t been received regularly.
On the other hand, the commercial banks in the country are still suffering from the backlash of the Indian Rupee (INR) shortfall which left scars more visible than pre-empted. When loans are not available, various economic sectors are hit hard, such as the construction industry that needs continuous flow of funds to carry out various projects on time. Apart from private home builders, this also includes the government’s huge ongoing developmental construction works like highway networks, bridges, schools, medical units, farm roads, electricity supply, gewog centers etc.
Another reason cited by banks is the slowdown in economic activities which led to meager income or profits from businesses.
Apart from the current FY, with most financial institutions having closed their accounts for the previous year, continuous alerts have been sent out through the national broadcaster by banks to either take ordinary citizens to court for being unable to pay their loans or make full payments including penalties.
Banks, as the last resort, can take legal actions by seizing mortgages against their client’s loans.
For the current FY, Bhutan National Bank’s (BNB) NPL stood at around Nu. 700mn in four months since the end of the previous FY in June this year. BNBL’s chief executive officer (CEO) Kipchu Tshering said the amount is very high.
When it comes to the bank’s remedial actions Kipchu Tshering said BNBL initiates legal procedures when clients do not pay up, which would lead to foreclosure or seizure of property. “We always give them the due warning,” he said.
The bank has already entered into legal suits with many clients that were notified.
However, he also said, “The current issue wouldn’t be very extreme and is going to be a temporary one.” He said business loans under the NPL category would eventually be cleared as soon as the government budget is finally released. “There might be a few extreme cases, but not every account. It’s just that the NPL has gone up this year compared to past years which for one reason are because of the budget delay,” Kipchu Tshering said.
Previously, BNBL recorded its highest NPL level at Nu. 200mn.
The other two commercial banks, Druk PNB (DPNB) and T-Bank have also experienced a rise in the number of loan defaulters.
DPNB’s bad loans level stands at Nu. 150mn while T-Bank recorded its non-performing assets (NPA) at Nu. 114mn since the beginning of the FY in July 1 this year.
Meanwhile, BoBL has been successful in preventing its loan accounts from becoming bad loans. The bank’s NPA as of August stood at Nu. 530mn and for the same period last year was recorded at Nu. 700mn.
About Nu. 250mn of net NPA is from the trade sector comprising of loan against work-order. The rest is from housing and commercial transport sector.
BoBL officials stated that apart from the many credit recovery measures such as repeated reminders, a thorough credit appraisal is being done to ensure quality credit.
BOBL’s credit chief, Karma Dema said, “It is not the quality of appraisal but the diversion of funds to other personal businesses that is increasing the NPL.”
The bank also monitors projects funded by the bank through loans by way of site visits.
CEO of BOBL, Pema N Nadik said, “The NPA figures seem to be following the usual trend during the year. We hope to bring down the numbers by the end of the year as usual.”
BoBL has recorded a lower level of NPA in the previous year as compared to past years.
Meanwhile, local banks have yet to receive the funds from the government’s Economic Stimulus Plan (ESP). The injection of funds from the ESP is expected to ease their current credit situation following the INR shortfall and liquidity crisis.