One of the major remedies adopted by the Royal Monetary Authority (RMA) to contain the Indian Rupee (INR) crunch is increasing the credit to deposit ratios and also risk weightages dramatically, which in short means that banks in complying with these measures have little or no cash to lend.
One major side effect of this is that several ongoing projects from factories to houses have no additional money to complete their projects or payments with the danger that they would default increasing the number of non- performing loans.
A senior board member of a private bank’s said, “When more clients such as the industries or private consumers default on loans, the non- performing loan (NPL) percentage exacerbates and once that happens it may even wipe out the provisions kept aside by banks.”
“It could have repercussions on real estate as well, so with all these factors RMA is intentionally creating a crisis”, he said. “When home builders are not able to complete construction activities, they cannot rent out their buildings and are bound to default on loans,” he added.
Druk PNB’s CEO N K Arora said the bank have informed RMA that the earlier circular issued by RMA is not in line with the interests of the economy. “We have discussed with the RMA and they have assured us that the issue will be reviewed next week”, he said.
Another banker said that the lending restrictions are literally choking the entire private sector which will take years to recover.
Letho of Druk Satair Corporation Limited said there are a lot of individuals and companies who have already commenced projects.”There is a need for financial adjustments given the number of projects in the pipeline that requires financial assistance from the banks”, he said.
President of the Association of Bhutanese Industries (ABI) Rinchen Dorji said, if there is a restriction on credit, it will be impossible for investors to come up with full equity. He said a major part of the investment in any industry comes from the debt market which is credit or loan, “and if that is not forthcoming, there will be no investors”.
“We have requested authorities to be very careful in imposing restrictions on credit”, he said
A senior board member of one of the financial institutions said, it can even lead to intentional defaulters. “Even if people are able to make their payments, they will choose to save it for financing other priorities because of the non- availability of loans from banks “, he said.
He said RMA claims that they haven’t restricted credit but the manner in which they frame the regulations indirectly leads to stopping all kinds of lending by banks.
Banks now have started radically stiffening their Capital Adequacy Ratio (CAR) belts. Capital Adequacy Ratio is the 10% minimum capital that the banks have to maintain against the loans given so that depositors are protected against liabilities.
According to BCCI officials there is widespread panic in the private sector as loans are not available and many companies big and small would have to shut shop and fire thousands of employees if the situation does not improve.
The financial institutions have been given time till December 2012 to catch up with RMA’s new regulations and the banks have been directed not to lend to a particular sector above pre set loan portfolio.
Meanwhile, UNESCAP’s (United Nations economic and social commission for Asia and the Pacific)‘Economic and Social Survey of Asia and the Pacific, 2012’ discussion organized by Royal Monetary Authority(RMA) was overshadowed by heated discussions on the current Indian Rupee (INR) crunch, deviating from the main event.
Executive Director of Royal Insurance Corporation of Bhutan, Sonam Dorji was one of many who are skeptical of the 9.8 % GDP growth rate projected by the report, an increase from 5.4 % in 2011. This, he said was unrealistic given the current domestic economic condition, referring to the restrictions that have been imposed on financial institutions by the authorities as a measure to curb the INR crunch.
Professor Sanjeev Metha of Royal Thimphu College, who was one of the panelists at the open forum, hinting at the current scenario of restricted imports and credit said, “In the next two to three quarters, we will see a decline in the growth rate”.