Finance Ministry proposes opening up home loans

The Ministry of Finance, in a meeting with the Royal Monetary Authority (RMA) on 4th April 2014 proposed that housing loans, under certain conditions, be opened up again.

The Finance Minister Lyonpo Namgay Dorji said, “In the meeting with the RMA we discussed the possibility of opening up loans to people wanting to own their own homes for self residency and also loans for commercial buildings in areas which require them.”

The minister said that the proposal for the home loan could apply to residents across Bhutan who want to build a house for residency purposes and not for commercial renting. This could be anything from a cottage, to a two story house to an apartment.

The minister said that commercial housing loans would be explored in places outside major Thromdes like Thimphu, Phuentsholing etc as these places had already reached a saturation point. He said loans for big buildings meant to be given on rent would be for places where there is a strong demand for housing and an existing shortage.

“The RMA was very receptive to the idea and they will be working on the modality,” said the minister.

“RMA has asked us to identify places for extending commercial housing loans through the MoWHS,” he added.

The MoF will also be working in collaboration with the Ministry of Works and Human Settlement (MoWHS) and the Dzongkhags to identify potential areas and towns that require housing loans.

Lyonpo said that an important parameter in deciding the places would also be the loan repayment capacity of the buildings.

The minister said that the details would be ready by the end of July 2014 after the current Parliament session after which it would be taken to the next level. The MoF would also sit with the RMA and then finally bring the matter before the cabinet.

The RMA on its part will be looking at the quantum of the loans and its impact on the balance of payments and the rupee.

Responding to concerns on whether there was enough liquidity in the banks the minister said that there was enough liquidity at around Nu 13 bn not including the recent Nu 2.1 bn in ESP funds.

He said that banks were restricted from giving housing loans due to a strict monetary policy from the RMA.

Lyonpo said, “We will submit the feasibility and other details and RMA will see to what extent they can give us the requirements and to that extent they will have to relax the monetary restrictions.”

The minister said that the MoF proposal for housing loans was as a larger part of the government’s concern that people should at least have a roof over their heads.

The RMA is working on a draft report on the issue and would be conducting a joint study and also field visits along with MoF and MoWHS officials.

It is understood that the upcoming budget session of the Parliament will see the introduction of a host of fiscal and tax measures to address the economy and the rupee crisis.

The RMA in the past had maintained that it had to take stringent monetary measures like stopping housing and transport loans or restricting overall credit due to the absence of fiscal measures like taxation.

The former government’s taxation proposal could not make it through Parliament with the result that RMA continued on with its restrictive monetary policy especially on housing loans.

Some upcoming fiscal and taxation measures from the government’s side could give the RMA some flexibility on housing loans.

Background

The housing loan was a major casualty of the rupee and credit crisis since 2012. In March 2012 the RMA had instructed banks not to give housing and transport loans following a major rupee shortage.

This was followed by another directive in the same month asking banks not to lend to sectors where their exposure was above 30 percent. In the case of some banks this included housing loans. The Credit Risk Weightage (CRW) for Housing loans due to the high exposure was also increased to 300 percent.

This made it more difficult to meet the Capital Adequacy Ratio (CAR) which is the 10% minimum capital that the banks have to maintain against the loans given so that depositors are protected against liabilities. This is because to calculate CAR, a key component required is credit risk weightage on loans. In short higher CRW on loans lowers the CAR which is not desirable for banks.

In May 2012 after a discussion with bankers RMA took a more moderate stand reducing credit risk weightage to 150 percent for loans exceeding 20 percent exposure by the bank. However, restrictions on housing and car loans were not lifted.

In 13th May 2013 a year later the RMA in another strong effort to control the rupee situation increased the CRW percentage dramatically in almost all loan sectors.

The RMA’s increased Risk ratio was 200 percent each for Service and Tourism, Housing, Transport, and others loan and 300 percent for personal loans.

This like in April 2012 lead to a virtual halt in loans by all banks as they could not meet the CAR with such high CRW.

After another round of discussions with the banks the RMA through a notification issued in August 2013 again made the CRW percentages more reasonable.

The CRW for housing loans was again reduced to 150 but with a specification that any sector with an exposure above 20 percent would attract an additional 50 percent CRW.

Though the CRW was changed up and down the RMA never did away with its directive to the banks to not give housing and transport loans.

The Bhutan National Bank CEO Kipchu Tshering said that even if the RMA lifted the ban on housing loans most banks would not be in a position to freely give the loans due to the high CRW.

He said that BNB would be the only bank which could give housing loans in bigger numbers since it had a stronger CAR.

The CEO said that for other banks to be able to give housing loans the RMA could consider lower the CRW percentages too so that banks could meet their CAR and thus open up their liquidity to housing loans.

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