Cabinet recommends three-year loan deferral for borrowers

The Cabinet in a letter on 5 June 2023 has recommended to the Central Bank, Royal Monetary Authority (RMA), to consider extending the loan deferment period for a minimum of 3 years, considering the challenging times, so as to provide financial relief and flexibility to the borrowers.

The Cabinet has asked for an option of allow borrowers to defer their loans without being subjected to risk categorization.

Under the Monetary Measure Phase 4 (MM4), RMA introduced the risk categorization of low, medium and high-level risk, and accordingly gave deferrals. Currently loan deferrals have been given till June 2024 to those who qualify.

According to the President of Bhutan Chamber for Commerce and Industry, Tandy Wangchuk, the deferral for 3 years has been approved by the cabinet. “We actually asked for 10 years deferral, as we cannot rebuild the economy within a 3-year time frame, however, we only got 3 years of approval.”

The Cabinet had also proposed to provide incentives for borrowers who choose not to avail themselves of loan deferral option.

The Cabinet had also recommended to the RMA board for temporary relaxation of the observation period for the NPLs for the next one and half years. The Cabinet also recommended to temporarily suspend all new commercial housing and hotel construction loan to ensure a coordinated stance between the government and RMA.

RMA has already implemented the suspension of the commercial housing and hotel construction loan.

RMA, however, is yet to implement the cabinet suggestion of the three-year deferral and the temporary suspension of the observation period.

Further recommendations also include RMA and Financial Institutions to consider permitting the liquidation of fixed equated installment facility (FEIF) accounts within a specified term, which could vary between 5 to 10 years, depending on the amount accumulated in the FIEF account.

It also included to expedite the issuance of the DGPC hydro green bonds, and developing facilities to enhance accessibility to individual foreign currency account, without the constraints of existing limitations.

The RMA is an autonomous body and so will have to take the final call on loan deferrals.

The economy is not doing well, especially the hotel sector and retailers. As non-performing loans (NPL) is one of the major concerns, which might put the banking sector at risk, the loan deferral might just be a temporary solution to the problem.

Bankers this paper talked to feel that the real problem and solution is government policy like getting in more tourists, stimulating businesses etc but the buck is being passed to banks through deferrals and this is not healthy.

When the Finance Minister Namgay Tshering was questioned on the matters of NPL, the Finance Minister stated that it is a concern. “Until date, we are yet to face a huge degree of concern, mainly because of the monetary measures in place. Based on government’s discussion with RMA, there will be a blanket deferral without any risk categorization for at least three years which will help business with adequate time to plan and roll out.”

He also added that the major concern after the deferral will be the economic shrinkage. “Banks will not be in the required position to give the required amount of loan because of the money being blocked by the deferral. The need for right now is to give deferral to recover their losses from the past 2 years. It is a double-edged sword, and we have to be very careful charting forward.”

The Finance Minister had also pointed out, during a meeting with the representatives of private sector at BCCI, stating that if not careful at this point in time, it will not take long before the banking sector becomes bankrupt. “When we give deferral at this point, we face issue in terms of liquidity. If the bank doesn’t have liquidity, money, they won’t be able to give out loans.”

“Banks’ lending money is a profit-making business for them, but they also have limitations. It is not the policy that is failing but the situation that is making things hard. When we give loan deferral, without repayment, it is difficult to lend based off on depositors’ money,” he added.

Lyonpo also shared some interventions for economic shrinkage. “From the fiscal policy side, as a policy intervention from the government, we will be working very closely with RMA to see if there is an opportunity for us to design a stimulus window to inject additional capital into the banking sector to ensure a consistent flow of money. Secondly, these things are not discussed yet, only thought over, within the Ministry of Finance on implementing a quantitative easing mechanism. We will also be looking into attracting external investors beyond foreign direct investments (FDI).”