NPL expected to jump from current 14% to 29% after June 2022
The Finance Minister Namgay Tshering, who is the Chairman of the National High Level NPL Committee said that in order to deal with the higher Non Performing Loans (NPL) that are expected after the loan deferment and Interest Payment Support ends in June 2022, he has two proposals.
The first is the rescheduling of the loans which has already started with the Housing Loan tenure being extended from 20 to 30 years and other loan sectors are also under consideration.
He said this has to be accompanied with the restructuring of the loans too which means reduction of the loan interest rates.
Lyonpo said it will require close dialogue with the Financial Institutions, and the Royal Monetary Authority (RMA) as the regulatory body will play the key role.
There has been some concern among bankers, one of whom talked to the paper after an earlier stress test by the RMA showed that the current NPL of 14% as of June 2021 could very well shoot up to as high as 29% which is Nu 50 bn.
The minister said that the 29% NPL figure is not a foregone conclusion and measures can be taken to deal with it from now itself.
Lyonpo said to bring the FIs on board with efforts to deal with NPL and get their inputs the RMA Governor will be meeting with boards of every bank and he would meet independently with the FIs CEOs and board members.
He said that both banks and borrowers have to be safeguarded as if the borrowers undergo distress then even the banks will undergo distress. He said the critical question now is how to avoid that stage.
Lyonpo said the banks should rehabilitate those NPLs that have a hope of revival and they should solve the matter amicably rather then just going to the court directly.
Lyonpo said when it comes to the really bad NPLs his committee has sent a total of Nu 3.2 bn for foreclosure to the NPL Asset Transfer Framework where the interest will be frozen for three years and within this period the bank has to get the NPL resolved in one way or another.
This move will bring the current 14% NPL down to 12%.
Lyonpo said that moving forward the RMA should come up with certain regulatory norms where it has to be ensured that the sanctioned loan amount goes only for the purpose it was sanctioned for. He said currently as long as the collateral is there the FIs do not really care, but from here on banks should follow up and release the money in stages only after verification.
On this front the RMA is coming up with a Guidelines on Loan Origination and Monitoring Loans.
Lyonpo said that banks should also offer differentiated loan interest rates with lower loan interest rates in the more productive sectors that lead to economic growth. It should be a viable investment with a good proposal. He said this can contribute to economic revival.
He said RMA has requested FIs to keep NPL below 5% but RMA should also come up with the prescriptive norms on how to contain it below 5% and if the banks do not implement it then they should be held responsible.
The minister said that one important outcome of the NPL committee is that there should be very few court cases as the effort is to resolve NPLs in an amicable manner.
The RMA stress test also showed that around 80 percent of the hotel loans can go into NPL after June 2022.
Currently banks have given out Nu 19.28 bn in Hotel loans.
Here, Lyonpo said that if hotels and others cannot pay then there is no point pressurizing them and so other measures like rescheduling, restructuring and etc have to be considered.
Lyonpo said that under the guidance of RMA, the banks are also coming up with a common asset valuation system as currently the same collateral or asset is valued differently by different banks or people and this can contribute to NPLs. Once this is done, the same piece of land being put up as collateral will have the same value across FIs.
One more thing to consider is the worse case scenario after June 2022 if the NPLs go very high and a bank has to be shutdown or joined with another bank.
Here too Lyonpo said though it is an unlikely scenario the RMA is coming up with a crisis management framework for the financial sector incase FIs close down and have to be joined together. He said here the aim will be to protect the bank and the clients.
One positive factor when it comes to the 29% NPL projected after June 2022 is that the large provisioning done by banks through collateral should prevent a major shock to the banking system.
The Prime Minister Dasho (Dr) Lotay Tshering said the government is also working on the NPL issue. He said if the government puts in some injection and there is flow of capital then the NPL may not be as bad as the borrower’s capacity to payback will be improved.
Lyonchhen said that the majority of the NPLs are from the big contractors but he said a solution here is that the Ministry of Works and Human Settlement has been asked to identify projects of Nu 500 mn plus and so if some works are given then it can improve the situation.
Lyonchhen also said that Bhutanese banks deal with only one currency within only one market of Bhutan with only Bhutanese customers and so they should make adjustments. He said Bhutanese banks have one of the highest loan interest rates and also one of the highest fixed deposit rates. Lyonchhen asked if the monetary provisions cannot be tweaked a little bit to ensure more liquidity in the economy.
He said Bhutanese banks are not impacted by international financial crises. He compared the banks to being like the blades of a blender and he said how smooth the smoothie will be will depend on the sharpness of the blades.
Meanwhile, in 2020 the credit growth depreciated to -41.39% compared to a positive 32.4% growth in 2019.
NPL was at 18% (28 bn) in March 2020 and this was reduced to 14% (24 bn) in June 2021.
Deposits increased by 16% from June 2020 to 2021 from 142 bn to 174 bn.