Bulk of interest waiver benefit to go to medium and small accounts

Banks to get relief through CRR and T-Bills

The CEOs of the two biggest banks in Bhutan, Bank of Bhutan (BoB) and Bhutan National Bank (BNB) both said that sheer majority of the interest waiver will go to medium and small borrowers.

His Majesty had announced the waiver of three months’ loan interest and deferral of three months’ loan repayment to help Bhutanese meet their loan repayment obligations in a difficult period.

The BoB CEO Dorji Kadin said, “We did the analytics and most of the beneficiaries are medium sized loans as we do not have too many big clients as we try and diversify our customer base. These are mostly those who own housing projects or small budget hotels.”

The BNB CEO Sonam Tobgay said that around 50 percent of its client base are GE or government employee loans of up to Nu 500,000 and these comprise the employees of government, corporations and large private companies who are all salaried people.

“A large chunk of the benefit will be going there,” said the CEO.

He said that the bank also handles businesses of all sizes as it clients and they too will benefit.

The same also applies across Financial Institutions where the bulk of the loans are held by small and medium borrowers.

Lightening the burden on banks

The interest waiver is coming to around 3.37 bn of which 50 percent is being funded by the government while the remaining 50 percent of 1.68 bn is being taken by the banks. BoB is bearing the largest share of this followed by BNB, BDBL, Druk-PNB, NPPF, T-Bank, RICBL and others.

However, this burden will be lightened by the RMA to a certain extent as it has already released 1 percent of the Cash Reserve Ratio (CRR) to the banks which comes to 1.4 bn to give it as working capital to wholesalers to build stocks of essential items.

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.

The RMA is expected to release another 1 percent CRR which will come to around Nu 1.2 bn to the FIs so that they can provide the working capital to tourism related businesses at 5 percent under the monetary measures.

In addition, the government to fund its activities and as part of its budgetary activities will also be floating Treasury Bills.

Now the banks can use their Statutory Liquidity Ratio (SLR) deposit with RMA to buy these T-Bills and earn some some interest there again.

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.

The BNB CEO said that in his bank’s share of the Nu 1.68 bn interest waiver is around Nu 350 mn and this can come down to around Nu 200 mn with the revenue from the other measures.

He said apart from allowing the banks to make some interest revenue the use of CRR and SLR allows the RMA to pump in much needed cash into the economic sectors when it most needs it.

The BoB CEO said that of the Nu 1.4 bn released through the first 1 percent CRR BoB got 620 mn to finance wholesalers and another 1 percent CRR would also give them quite a bit of funds to finance tourism businesses.

NPLs not impacted by waiver

Bankers said that while the waiver of the loan interest will impact their profits, it will not impact their Non Performing Loan (NPL) figures and will in fact help them.

They said that many companies would have been defaulting if not for the loan extension by three months and so the NPL figures of the bank would not take a hit for another three months.

In an indication of how troubled the economy was from last year itself many FIs saw record high NPLs in 2019 December itself.

The BoB CEO said that though the BoB target was 2.5 percent NPL it reached 3.61 percent by December 2019.

The CEO said loan repayments are really hit as the NPL increased to 4.59 percent in February and jumped to 7.61 percent by March. He said that the budget hotels and smaller hotels that rely on regional tourists had been hit. BoB has given loans to both the airlines which have also been hit. He said on the construction side it is not as bad as people are still paying their rents and loans.

The BNB CEO said that before the COVID-19 issue came along the economy was already in trouble.

He said that the NPL for BNB in December 2019 was 8.54 percent and so BNB could declare a profit of only 62 mn as it had to provision 1.015 bn in profits against the NPL.

The NPL doubled to 16 percent from February and was around the same for March. He said the worst hit are the trade and commerce loans which are essentially over draft loans to different businesses and the worst hit among them was the construction sector due to lack of adequate government construction projects. This loan segment comprises around 43 percent of the BNB’s NPL.

He said in the case of BNB since most of the hotels are under construction the impact on NPL will come a few years down the line. The BNB CEO said that the NPL could improve as it has put a few cases to the court.

BoB has around 13 bn in hotel loans while BNB has around nu 6.5 bn.

Liquidity

In terms of liquidity, until last year, FIs suffered a liquidity crunch. There was some concern that the deferral of loan payments may impact the liquidity of banks.

However, both BoB and BNB said they are currently fine on the liquidity front. The BoB CEO said they learnt from the volatility of government accounts with them and they prioritized more one deposits from people and now have the highest liquidity.

The BNB CEO said they have always been comfortable and currently have 800 mn in liquidity not counting the CRR release coming from the RMA.

The BoB CEO said given the state of the economy people anyhow are not coming for loans in large numbers so the FIs would be comfortable and have funds to lend.

The BoB CEO pointed out that the manufacturing sector is also not doing too well as the lockdown in India has impacted the import of raw materials and then exports of finished goods. He said the FIs are keeping track and in that sense the loan deferment also helps this sector among others.

Common interest

The BNB CEO commenting on the interest waiver and the loan deferral said, “At the end of the day what is BNB without the other sectors of the economy working well. If the economy is not doing well then our own survival is at stake. I have always said that banks and clients must have a symbiotic relationship with both the banks and clients winning as the banks will not do well if the clients are not doing well.”

Financial Institutions Association of Bhutan Head Karma said, “Bhutan is going through a very vulnerable period but if we take the steps outlined by His Majesty we will come out fine.”

“What are the banks without a strong Bhutanese economy and so the measures are worth it. It is in the interest of our own survival that the rest of the economy is saved. The cost of interest is borne by FI shareholders and RGoB,” he added.

RMA Speaks

The Deputy Governor of RMA Phajo Dorjee said that historically the NPL figures go up by January, February and March since the payment is made by December to close the account and renew OD accounts and then payment gets lax for the months after December.

The DG explained that the NPL cut off date was set at 29th February 2019 as the impact of COVID-19 started from January and so people would have been unable to meet loan commitments from February and March.

The DG said it it takes a full 90 days for a loan to become NPL so people unable to pay loans even from December 2019 would benefit.

He said the understanding also was that the interest waiver benefit should be for the COVID-19 effected businesses and so those already under NPL from before that would not qualify. He said that giving the waiver to all NPL loans even before February would create a precedent whereby people would assume that it is okay to not pay loans.

The DG said that all categories of loans were benefitted by the waiver. He said that even in the case of big loans those are in big economic activities which have to do with job creation, exports, import substitution and earning of foreign exchange.

The DG said the measures are for three months for now since there is optimism that the situation will improve by then and if it does not then discussions will have to be held at that point of time.

He said the RMA has already deployed officers to see the deposits, repayments and loan disbursals at FIs along with other indicators that would give RMA a good picture.

The DG clarified that while the loan interest waver has been given the FIs have already agreed with the RMA that  the deposit rates will continue as normal and even new deposit rates will not drop.

Monetary measures

The monetary measures are waiver of loan interest payment for three months as Kidu applicable to only performing loans as of 29th February 2019. Loan deferment for three months is for both performing and non-performing loans. The exception is loans to the government, FIs and staff incentive loans.

The gestation period of loans for under construction projects which have not yet started repayment will get another three-month extension and their interest will be waived off as Kidu.

Working capital loans at 5 percent for 4 years will be given to tourism related business from April to June 2020.

Micro Loans up to Nu 500,000 will be given at 2 percent to promote agriculture and working capital to Cottage and Small Industries will be given at 4 percent from April to June 2020 with the loan tenure as per the FI’s rules.

However, only clients with good credit standing as of 29th February 2020 will be eligible for the facility.

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