It’s been almost half a year since banks stopped housing, vehicle and other loans after the central bank put in place new restrictions back in April this year, which lead to a virtual credit freeze. The sudden freeze on credit was largely attributed to the Indian Rupee (INR) shortfall as it was perceived that the excessive credit had fueled the shortfall.
However, the situation now is that commercial banks will not be able to lend even if the Royal Monetary Authority (central bank) lifts its restrictions.
This is because all banks suffer a severe liquidity crunch due to lack of adequate deposits which means banks have no cash to lend to any new clients.
CEO of Bhutan National Bank Limited (BNBL) Kipchu Tshering said it wouldn’t make any difference if RMA lifted the freeze on loans. “There is no liquidity in all the financial institutions,” he said.
BNBL has stopped all loans “except for clients whose houses are under construction” and have availed the loans before the restriction was put in place.
An official with Druk PNB’s (DPNB) loan section said the situation is still the same with the bank. “No loans are available at all with the bank at the moment,” he said. “It will continue for quite some time”.
Earlier, T-Bank’s credit manager Leki Tshering said the bank will be able to provide loans again if the level of deposits increases in future.
Upon inquiry, a senior credit officer with T-Bank said it will take some time before the bank is in a position to lend. The bank has stopped all kinds of loans as of now.
Even the Bank of Bhutan Limited (BoBL) the largest bank in the country is unable to provide any loans. A senior credit officer with BoBL said loans with the bank are all “closed” for now. “We have nothing to do with the central bank and it’s the decision of the management”.
While commercial banks in the country provide other loans strictly to existing and select clients depending on cash availability, the central bank does not know as to when and up to what extent the grip on loans could be loosened.
RMA Deputy Governor Eden Dema said nothing has been discussed as yet with regard to restrictions on the loans. “We will inform the media as soon as we do it,” she added.
A credit analyst with BNBL said the restriction on vehicle and housing loans is here to stay for an indefinite period of time due to the commercial banks’ “own liquidity crunch” regardless of whatever may be the central bank’s directives.
He however said that other loans though scarce could be available soon. “Otherwise what is the need of a bank and how can the bank survive,” he said.
Most bankers said that, given the liquidity crunch showing no signs of improvement, they might not be able to lend, with or without the restrictions.
Liquidity in the country’s commercial banks is to a huge extent also influenced by the deposits from Druk Green Power Corporation (DGPC) . Substantial amount of single withdrawals made by such companies can easily rattle the liquidity reserves of a bank. DGPC withdrew about Nu 8bn from BNBL earlier this year, literally draining the bank vault.
Eden Dema said of the many factors, “overdependence” on such corporate deposits and not focusing on retail deposits is one main cause of liquidity problem. “When they withdraw the deposits, a huge vacuum is created in the liquidity with the bank,” she added. “Retail or individual deposits are much more stable”.
Another reason she cited was the “mismatch” between the lending and deposits “tenure” which means banks facing a liquidity crunch has short term borrowings and long term lending. While the depositors invest in banks for a short period of time, the money is being loaned out by the bank for a longer term to a customer, which on an average is for a period of five years.
Eden Dema also said low interest rates on deposits which are much below the inflation rate can also lead to liquidity issues. “Deposit rates are low and as a result there is no incentive for any Bhutanese to save”, she explained.
In the meantime, RMA has for the first time introduced base rate system in the country. Operation guidelines on the base rate system for the financial institutions have been in effect since the beginning of this month.
The interest on loans if available will vary from bank to bank, because lending rates will be based on how much it costs each institution to congregate deposits to lend out as loans.
That means old banks such as BoBL and BNBL will be eligible to offer loans at lower interest rates than the rest.
The Base Rate is the minimum rate below which it shall not be viable for the financial institutions to lend. The Base Rate also serves as the reference benchmark rate for floating rate loan products, apart from other external market-based benchmark rates.
However, bankers say it’s just an additional regulation by the central bank and will not help the commercial banks in terms of lending as of now.
Talking to The Bhutanese, a veteran banker in the capital said, “No banks in the world are ready to admit that they have no money. If they are short of funds today, they will reveal it five or six years later”. This he said was to maintain the bank’s status in the market and to avoid panic among depositors.
Meanwhile the percentage of Non-Performing Loans (NPL) and Non-Performing Assets (NPA) with commercial banks in the country has suffered a rapid increase in the last few months since the credit crunch surfaced in April 2012. While there is no question of lending, some have difficulty in making huge payments to their clients through the current accounts of Banks due to the cash crunch.
Several hundred personal home builders and contractors across the country, especially in Thimphu face severe issues with regard to monthly payments on the loans they had taken earlier because the incomplete buildings are not even ready to yield rental income which force them to default on their payments.
Contractors and experts fear that such a situation can trigger a real-estate crisis soon.
Even if the bank forecloses or seize collaterals from the defaulters, the bank will have to eventually sell it in the market. However, with no financial assistance at all from the banks there will be a dearth of buyers despite a decrease in the land value.
Since loans are not available, the worst hit is the construction and automobile industry (see automobile industry story on page 1) which 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.
Secretary General of the Bhutan Chamber of Commerce and Industry Phub Tshering said members of the private sector including construction industry shall meet to discuss, analyze and sort out issues.