Implementation of phase four monetary measures may affect cash flow for Banks

The Royal Monetary Authority (RMA) recently issued the Standard Operating Procedures (SOPs) for smooth implementation of Phase Four Monetary Measures.

The SOPs state that support measures include deferment of loan repayment, partial repayment, extension of maturity period for loan term, change in repayment frequency, conversion of overdraft/working capital facility to a term loan, loan splitting, transfer of loan to third party and extension of gestation period.

As per the risk assessment, hotels and restaurants (both budget and tourist standard) and tourism are categorized as high risk and they are eligible for deferment of loan repayment for up to two years with option of partial repayment (50 percent instalment) up to 2 years.

For moderately risked sectors, like construction, entertainment, housing, manufacturing enterprises, personal loans etc., the deferment is up to 1 year with option of partial repayment of also 1 year.  For low risk sectors, like ICT, contracts, hydropower, renewable energy, agriculture, forestry, loan against fixed deposits, etc., extension of gestation period of two years may be applied depending on progress of the project.

The maximum loan term for the construction or setting-up of hotels and restaurants shall be up to 30 years (excluding gestation period), applicable for both existing loans as well as new loans.

The report also states that the FSPs shall not capitalize the interest accrued for loans under deferment of repayment or partial repayment under the Monetary Measures. At the end of the deferment period, the total accumulated interest for the entire deferred period provided from Phase I to Phase lV Monetary Measures shall be converted into ‘Fixed Equated installment Facility (FEIF)’ payable in equal installments for a period up to five years.

Chief Executive Officer (CEO) of Bank of Bhutan (BOB), Dorji Kadin, said that the deferments and monetary measures are unlikely to affect the profitability of financial institutions since the interests will still be accrued in the book, which will be reflected as ‘interest income’. However, he said that it will impact the cash flow of the financial institutions.

“If the repayment to the financial institutions is not sufficient, we will not be able to support important activities, like loan requirement etc. We may be able to support them, but not to the same extent as before,” the CEO said.

CEO of NCSI Bank limited, Kinzang, said that aside from the cash flow, NPLs are expected to remain unchanged.

“We have been discussing on the monetary measures. While there are so many things that are being implemented, our CBS system takes months to accommodate and implement them. We have decided to request for extension for implementation of these measures until about three months,” Kinzang said.

However, NCSI Bank plans continue the deferments as per the developments. According to Kinzang, there are some clarifications to be made regarding the measures and challenges faced when implementing them, which will warrant additional time extensions before executing them.

“The Core Banking Solutions are adjusted to fit into its own banking routines, but when such measures are announced, it cannot be altered to work in accordance to the bank, and the system must be changed to fit the measures and deferments that have been directed which includes inputting thousands of information within few days in the system so that these changes are incorporated,” said Kinzang.

According to the CEO of RICBL and the President of Financial Institution Association of Bhutan, Karma, the Government and the financial institutions are still in the process of discussions to fine-tune the monetary measures, and they may be subject to change, taking factors, challenges, clarifications, etc., into considerations.  

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