Credit crisis continues to escalate

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.

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  1. It should teach a very good lesson s to the employees of the commercial Bnaks why customers are important to the Bank. No customer deposits, who suffers ? banks suffers. When Bank suffers employees will suffer. Retrenchment and layoffs. In Bhutan Bank employees have such ego and attitude they treat thier customers like hell. Keep this problem going and it shall teach their attitude towards customer. Paldem Drukpa Lhagyelo.

    • I completely agree with u. They should be given ego training n not customer service training.

    • I totally agree. Especially, the clerk responsible for issuing statement and another one dealing with loan section in Punakha bank have very high ego. They keep playing solitre game on computer even without responding to the customer’s query. If we try to disturb their game, they get annoyed and shout at customer. I had to finally resort in taking them to the bank manager chamber for benefit of general public.

  2. drukpa drukpa

    @tshering.    come on man. if you are a concerned citizen of this land please try to look beyond personal interests. This has more to do with the national interest than just employee ego issues.  The country’s economy is falling apart by the day which is hardly addressed or may be intentionally ignored by the authorities. INR shortfall-credit crisis- housing / real estate crisis- ..  these are not a matter of joke!!!   one should take up the issue seriously for the good of the country and its people who have come this far with the guidance of our beloved kings.   

  3. drukpa drukpa

    the government of the day is doing nothing but letting go all the 100 yrs of efforts of our monarchs astray. guru rinpoche save the people and this country from such a government

  4. We should stop blame game. The credit crisis was home brewed. We always want to own something beyond our means and spend more than we earn. There is no savings. We are living from hand to mouth. All salaried people are always waiting with crossed hands for the months to end.

    This crises is timely, otherwise we could have been in deeper crises than now. RMA’s measures put in place are also appropriate and timely. Kudos to RMA!

    • This shows how ineffective our ruling Govt.,RMA and MoEA are for not foreseeing such a crisis. If RMA were to act as they did last time should have had the liberty to do it two years ago in which case things could have been under every body’s grib/control. We are totally upset to have been under such strains in the land of GNH that RMA comes out with stern action abrubtly jeopardising every body’s plans and programmes without pre-formulative informations of phasing out in just fair and square manner. They were waiting for those influential elite group to complete their part of borrowings as they pleased who even succeeded obtaining 200% loans for their constructions infew cases whereas some of us who after having retired from service for over three decades have been denied the facility to construct a house that we would dream for in our life time. If what is reported is true that the FIs are unable to service the loan facility to the much needed clients like us and if it has to go for a indefinite period, then the immediate solution would be CLOSE DOWN all the Banks and retrench all the employees. Their existence is totally uncalled for if this is what the scenerio is as presented now. Such a thing could be possible only in Bhutan THE LAND OF GNH.

  5. If someone was an economist or had taken a economic class, he would realize this is political game with vested interests. If car import was not taxed that heavily and rather the interest for car loans was increased than that would have been a solution to an extent. Much more to add but knowledge leads the worls today and to share things on such open forum is to dig a pit for self burial.
    Will tou tell me if spain created internal crisis or the crisis befell on her? Here the credit crunch is politicized, they call it national interest but purely it is a political interest. Shame on those civil servants, who willingly impose all these propaganda, do you see these credit ban to be lifted before this government dissolves? If not, see again and it will turn true.
    I dont see vested interest in this headline, as does one jaundiced eye.

  6. If someone was an economist or had taken a political science class, he would realize this is political game with vested interests.
    If car import was not taxed that heavily and rather the interest for car loans was increased than that would have been a solution to an extent.
    Much more to add but since knowledge leads the world today and knowledge is contageous, to share ideas on such open forum is to dig a pit for self burial.
    Will you tell me if spain created internal crisis or the crisis befell on her? Here the credit crunch is self created, they call it for national interest but it is likely this is of political interest. Shame on those civil servants, who willingly impose all these propaganda, if my conscience works, i understand RMA is a seperate body, why did it not question the desperate use of money in mcKinsey, economic suicide at Thimphu Techpark and so on?
    Do you see these credit ban to be lifted before this government dissolves? If not, see then and it will come true.
    I dont see vested interest in this headline, as does one jaundiced eye.

  7. the problem is certainly home-brewed. Where did all our surplus money go? Paying Mckinsey? Selling off $200m in one go? DGPC withdrew 8b from BNB. That was one time, what about other times? What about the other hydropower projects?

    This is all govt money and all being spent too fast just for hydropower. While theoretically we can say that we can do hydropower plus other projects so as not to have have all our eggs in one basket, the fact is hydropower needs so much money there is no money left over for other development. So now our eggs are all going to be in one  basket anyway.

    And all other development is coming to a standstill. Are you still not sure who is to blame??

  8. I do not buy the reasoning that DGPC withdrawal caused liquidity shortage in the country. It may have caused liquidity shortage fore BNB but not the country as the bulk of money withdrawn by DGPC has to be in circulation in the country. One of the main causes may be asking foreigners (Indians) to close their deposit accounts and take back their money. I am still preplexed how RMA could take this step at the critical juncture. The issue could have been resolved at a later time, not when we were facing a rupee and financial crises.

  9. It ain’t timely if RMA puts up measures after the crisis occurs. They should have tighten the noose on the banks before all this over lending occurred. The economy should recover by 2014 when some hydroprojects are making money.

  10. In other countries like Canada, they encourage foreigners to deposit their money in the Bank but in Bhutan, Indians were made to close their accounts by withdrawing their huge deposits which had in fact created rupee and credit crunch. Our small Bhutanese economy is interdependently linked up with India. Our economists should have undertaken proper research before abruptly freezing economic actvities. It is indeed a complex issue but should not be left to go on like this. The credit crunch will result to regional imbalances as the whatever money available within the country is circulating only in Thimphu and adjoining areas. Our honourable MPs must wake up and do something otherwise we voters will prepare to replace you in the next election.

    • The only reason for accounts of Indian nationals being closed is that it seems to have been done under some pressure on our government by the Indian government. Like you said, it makes no economic sense to have made such a move and the plausible reason looks like the one I have provided.

  11. I would love to see the banks bleeding… as a punishment for their casual and complacent nature, and taking the public (as their cash source) for granted! There must be some leaning and retrenchment too… so bank employees get to fully understand the economics of the banking industry.

  12. We Bhutanese must be realistic and proceed cautiously. The size and strength of Bhutanese economy is interlinked with Indian economy by the very fact that Ngultrum is pegged up with rupees. In a way it is a comfortable situation provided if our economists know how to interact with.

  13. I think blame game is not the answer to our problems.the. World is facing infect smack in the middle of a tsunami economic crisis.we in Bhutan can make a choice.are we going o do what we do best by blaming all and sundry for our woes or stand strong and look for a solution to our problems.
    Sometimes problems are opportunities in disguise.let us put our differences aside and work together.
    We can start by encouraging our farmers by buying their produce.yes it is ghastly exorbitant but with time volumes will increase driving down the prize to affordable levels.some are going to raise the unaffordability banner and rightly so .but as I said earlier it is us that will choose if we want to spend forever dependent or at least be food self sufficient.I am sure the market created will encourage many farmers to grow green gold,we will have healthy (lesspolutant) foods,self employed youth,stop the inr bleeding,soon become exporters of healthy foods (less volumes more quality).small is beautiful let us be Beautiful Bhutan!

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