The Finance Minister Lyonpo Namgay Tshering said that the government is planning to go for external borrowing at concessional rates so that it can sub-lend this money to Financial Institutions, which will improve the capital base of the banks and enable them to lend more to the private sector.
The capital of a bank is its share capital and reserves and does not include deposits which are its liabilities. It is important because the higher the capital of the bank the more it can lend out. Currently the Capital Adequacy Ratio (CAR) set by the Royal Monetary Authority (RMA) is 10 percent down from 12.5 percent before COVID.
This means that if a bank has a capital of Nu 500 mn it can lend out Nu 5 bn in deposits. Capital helps the bank cover against losses.
The minister said that for now there is no issue with either liquidity or the capital as there is adequate liquidity with the banks.
Lyonpo said that in the future the capital base needs to be broadened.
He said that moving forward in a post COVID scenario in order to help the private sector the main aim is to ensure easy access to financing.
“We need to make sure that banks are resilient enough to absorb all these shocks and for that purpose we have been liaising with the banks,” said Lyonpo.
He said liquidity is not the only issue here because as they move forward they want to see a lot of heavy investments to bring back the economy on track and here a key issue is if the banks have an adequate capital base.
Lyonpo said the key issue in the discussions they had with the FIs is on the capital base and the banks have agreed to that. He said possibly the government might need to chip in and work with the FIs in terms of pumping in some additional capital to the FIs through a sub-lending mechanism so that banks have an adequate capital base and private sector has easy access to lending.
Lyonpo said in a post COVID time banks need to have adequate capital base to ensure accessibility to credit so that bigger manufacturing industries can also get lending. Otherwise he said there will be crowding in credit if a borrower takes out Nu 500 to 600 mn loan then and the bank will not be in a position to lend out to additional borrowers. He stressed that this plan is for the future when heavy investments will be required.
“We need to build up the current liquidity and broaden the capital base of the banks so that the banks will have higher authorized capital to enable it to lend out to the private sector,” said Lyonpo.
Lyonpo in order to increase the capital of the banks the government will explore external sources through concessional borrowing and bring in some funds and this will be sub-lent to the FIs. Lyonpo said that is the only possible option and FIs also want this kind of support in the near future.
A banker on the condition of anonymity explained that what Lyonpo is referring to is Tier Two capital.
He said Tier One capital is the shares and reserves and Tier Two capital includes bonds issued by a bank for a fixed number of years. Tier 1 and Tier 2 assets are added and then divided by risk weight assets (level of risk of a loan) to come to the Capital Adequacy Ratio of the bank.
The banker said that the government can borrow money from outside at a concessional rate. Then the FIs can issue bonds and the government can buy those bonds with that money at a fixed coupon rate for a fixed number of years.
He said a similar example would be the former government’s Economic Stimulus Plan (ESP) of 2013 when it gave Nu 2.1 bn to all the FIs in return for the banks issuing bonds at a six percent rate. The bonds issued by the banks became the Tier 2 capital of the banks and so they could use that capital to lend out more money. The bonds were for 10 years till 2023.
The government’s plan to improve the capital base will help all the FIs but it will be especially useful for banks like the BoB and BDBL which have large deposits but not a comparatively large enough capital to be able to lend out its big deposits.
On the other hand banks like the BNB are well capitalized and such funds will further strengthen its ability to lend even more.