Most major banks stop all loans as Credit Crisis goes from bad to worse

One of the major reasons for the crunch is RMA’s attempt to reduce growing rupee imports

In what will hit the Bhutanese economy hard most major banks like Bank of Bhutan, Druk PNB and Tashi Bank have recently stopped giving loans to the public.

The only banks giving some loans are the Bhutan National Bank and the Bhutan Development Bank Limited. However, BNB is low on deposits and is also expected to run out of money to loan if the current situation persists. BDBL can give out only small loans for mainly agricultural activities.

All of this comes after a Royal Monetary Authority(RMA) notification on 13th May 2012 asking all banks to comply with higher Risk Weightage Percentage for a broad category of major loans like Service and Tourism, Personal, Housing, Transport and Others.

The higher Risk Weightage Percentage makes it more difficult for the above banks to give loans.

After the application of these Risk Weightage Percentages most banks have discovered that they are not in a position to issue any more new loans and have thus stopped giving loans.

This is because, for the protection of depositors the RMA ensures that for every loan given out there is percentage kept as capital with the bank called the Capital Adequacy Ratio (CAR) which is currently at 10 percent. So if the risk ratio is given higher than the capital required to be kept by the bank is also higher.  In short higher risk weightage ratio on loans lowers the CAR and as per RMA regulations CAR cannot go below 10 percent.

The RMA circular says, “The financial policy committee of RMA board has identified few sectors which showed increasing loan exposure trend and also potential risk associated with these sectors. The RMA board in order to curb and regulate the credit flows to those sectors, has decided to increase the risk weightage percentages”.

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

Earlier the risk ration was lower at 100 percent to 150 percent at the highest end.

With housing and transport loans already suspended by all banks the biggest impact of the closure of loans will be on the personal and other loans.

Earlier businesses and individuals could tide over the credit crisis as they could get personal loans with a limited period of five years from banks or could avail other facilities like Overdraft facilities and working capital for businesses.

The loan restriction is also expected to have a downward effect on land prices as the RMA notification itself explicitly mentions that loans to buy land cannot be given.

An RMA official on the condition of anonymity said, “The main aim here is to curb rupee imports as credit is still growing and 80 percent of every loan is resulting in rupee imports that cannot be sustained at current levels.”

He said that people where taking personal loans and misusing it to build and buy houses.

Bhutan’s rupee loan currently stands at around Nu 20 bn and is growing by the day.

Given this dire situation The Financial Institutions Association of Bhutan (FIAB) has requested for a meeting with the RMA on the issue to request the RMA to reconsider the new restrictions. Currently both the Governor and Deputy Governor are out of the country so a meeting is expected to happen will happen once they are back.

The Chairman of the FIAB and BNB MD Kipchu Tshering said, “With RMA’s new conditions most banks do not qualify to give out any more loans as their CAR would fall below 10 percent.”

BOB CEO Pema Nadik said that as of now the bank had stopped issuing any loans and even though proposals were still being accepted they would be kept pending until after a meeting with RMA.

He said his bank had until recently been giving loans to various productive sectors of the economy, facilities like Over Draft, working capital and also personal loans which had all been  currently suspended. He said earlier housing and car loans had already been stopped.

BOB has around Nu 22 bn in deposits and Nu 17 bn in loans but the problem is that it has a capital of only Nu 3.6 bn pushing it to the edge in terms of CAR.

Druk PNB CEO N.K Arora also said that towards the end of May he had issued a circular to his bank and all his branches to stop issuing any kinds of loans.

PNB has Nu 5 to 6 bn in deposits with around Nu 4 bn in loans and around Nu 700 mn plus in capital also pushing it to the edge in terms of CAR.

The T- Bank CEO Tshering Dorji also confirmed that after RMA’s new requirements his banks also had completely stopped giving loans.

T- Bank has deposits of around Nu 4.5 bn with loans of around Nu 3.5 bn and a capital below Nu 300 mn making it the bank most vulnerable to CAR.

The BDBL MD said that his bank can give loans to farmers and small cottage industries as a developmental bank but not major loans. BDBL had deposits of around Nu 4 bn but loans of Nu 6.8 bn. This developmental bank, however, does not rely solely on deposits and also gets external and internal borrowing. It has a total capital of Nu 7.6 bn.

The BNB MD said that his bank’s position is better than others in terms of capital as the International Finance Corporation had invested around USD 29 mn for a 20 percent stake. BNB CAR even after the RMA restrictions is at around 17 percent.

However, the MD admitted that if the current economic scenario continues and deposits are hard to come by then BNB too would run out of money to loan out in the near future.

BNB has around Nu 19n bn in deposits but has already given out around Nu 18 bn in loans. It has the highest capital among all commercial banks at Nu 5.8 bn.

The FIAB Chairman and BNB MD Kipchu put the blame for the current scenario squarely on the former DPT government for not having a clear fiscal policy.

He said, “The government seems to have had no control over the economy and in the absence of fiscal policies from the government the RMA is taking monetary policies to the extreme to deal with the situation.”  He said this was not helping as it needed proper fiscal policies from the government as well like taxation or raising revenue. Some other bankers also agreed that RMA in its own way was trying to do its best in terms of an extreme monetary policy in the absence of adequate fiscal measures in the past.

He said, “The DPT problem has created this problem first by giving consecutive pay hikes which drove up public expenditure and secondly by not taxing imports. The government also needed to cut its expenditure.”

The MD not mincing any words said that political parties did not understand the economic problems nor had solutions to address the issue and create economic growth but instead were coming up with more schemes.

The BNB MD said that there were only two ways out for the banks of which was one to completely stop giving loans which was already happening and the second option would be for banks to sell their shares and inject capital into the banks so that they can meet the CAR and start giving loans again.

However, the heads of all three banks that the paper talked to were skeptical of going in for selling of shares.

The BOB MD said that the bank was a government owned one and if it did sell shares then the government would lose revenue in the long term to solve a short term problem. He like the BNB MD also said that given the current situation of there being no money in the market and with the limited response to T-Banks shares issue it was questionable if banks could even get the capital. The Druk PNB MD also ruled out going for fresh shares issues given that his bank had gone for one in the recent past.

A banker also said that existing shareholders would not like to see their shares devalued and earn less income just after they had bought it.

Tenzing Lamsang/ Thimphu