FIAB head not in favour of collateral free loans or lowering of loan interest rates
A major concern of the private sector and to an extent the Financial Institutions (FIs) has been the availability of liquidity or money to lend out so that economic activities can continue or start in the middle of the pandemic.
The Financial Institutions Association of Bhutan (FIAB) head and RICBL CEO Karma said the FIs would like to assure the private sector that enough liquidity or borrowings will be made available.
He said that an arrangement has been done between the Royal Monetary Authority (RMA) and FIs which will allow more liquidity and a formal announcement and the details will be made available later.
The FIAB head said that the loans will be given for productive investments that have the capacity to pay back as the FIs have to also safeguard the money of depositors.
In a Thursday meeting between the sub committee of the Private Sector Task Force for COVID-19 and the sub committee of Financial Institutions jointly called the ‘Joint BCCI and FI Committee’ the issue of liquidity came up.
In the meeting the FIs representatives did a presentation which showed that certain banks like BoB, Druk PNB and Tashi Bank had enough deposits to lend but they did not have adequate equity or Capital Adequacy Ratio (CAR) to be able to lend out the deposits.
CAR is to see if the bank has enough capital against its credit exposure risks to be able to take certain losses.
So these FIs would need an equity injection to be able to lend more. The particular focus is on the BoB which with some equity injection can lend out a lot more.
On the other hand, banks like BNB and RICBL had enough equity or CAR but needed some deposits or liquidity injection.
The issue discussed in the meeting was if some FIs who need the equity can get an equity injection and those who need liquidity can see if the RMA can deposit some funds with them.
The concern, however, in the committee in words of one of its members, on the condition of anonymity, is not to ‘create monsters’ that would harm the economy.
Giving his take on what can be done to help the economy the FIAB head said that the need of the hour is to increase the aggregate demand in the economy as this is what will keep the economy moving and the others things can then be fine tuned later.
The FIAB head said that a lot of expectations are being placed on FIs and financing is seen as the solution to the many woes faced by the economy due to COVID-19.
However, he said that finance while being an important input is just one of the many inputs required.
He said that finance is of no use if there is no labour alluding to the labour shortages, adequate transport or the availability of raw materials. He said finance in fact comes in later and these things have to be in place first.
In the ‘Joint BCCI and FI Committee’ which had its first meeting on Thursday from the private sector side the main focus was on the Phase 2 Relief measures of which the main one was a soft loan of 5 percent for a four-year term to the private sector for paying salaries, buying raw materials and keeping businesses operational.
The Central Bank had already come up with the Standard Operating Procedures (SOP) that the loan and collateral value would be 1 to 1.
This means that normally a bank would undervalue a collateral for a loan way below the market price and then release only around 70 percent of the value of the collateral but here it would be 100 percent.
So if a property’s market value is Nu 20 mn the bank may value it at Nu 10 mn and then only release Nu 7 mn where as under the SOP the full Nu 10 mn has to be released.
Here the private sector request is if the collateral requirements can be relaxed a bit and in some cases collateral free loans be given for the smaller businesses who cannot afford a collateral.
The other request from the private sector is that the four-year tenure of the soft loan is quite short and so if the tenure can be extended a bit. The understanding here being then the burden would not fall upon the government to support people who lose their jobs and the private sector would be sharing that burden.
Karma said that the sub committee of the private sector and the FIs has been formed to help each other and understand each other.
“The FIs would like to hear their concerns and the way they see us and we would like them to understand our systems and processes in a transparent manner and find common ground.”
On the issue of collateral free loans Karma said the money in the banks belong to the people and it does not belong to the bank or the government and so he said that fundamental risk management has to be done.
He said that even if the government guarantees the loan in some way the government will not be able to guarantee if the person taking the loan is doing the job.
On the issue of the private sector asking for lower loan interest rates, the FIAB head said that this is no point asking for it as the banks have to pay the depositors a certain interest rate and so it cannot take a deposit at a certain rate and then lend it out at a rate below that.
The idea of a ‘bad bank’ was discussed in the joint committee meeting. Bad banks are institutions in other countries that buy bad debt from banks to recover at a discount so that the Non Performing Loans would be off the books of the banks. Such a bank, however, would need an Act and rules.
In the joint committee meeting the issue of liquidating Non Performing Loans (NPLs) quickly also came up but certain cautions were also raised. The issue came up that even if a bank was allowed to take over an asset with mutual consent what would happen if the bank only sold the asset at the value of the loan and the asset owner lost out with the benefit going to the one who bought the property.
The same joint committee has to come up with fiscal proposals on tax reduction but the private sector side is not too sure if the FIs would be interested in this and if this may have to put through the larger Private Sector COVID-19 task force.
The FIs have made it clear that they aim to support the existing businesses and so do a review of the viability of their ability to pay.
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