RICBL in a deep hole with record high NPL, 1.4 bn loss and downgraded credit ratings

The company is in the midst of root and stem reforms to deal with the fall out

RICBL is Bhutan’s largest insurance company and handles all life insurance and most vehicle, equipment, projects, building and other insurance

The country’s biggest and oldest insurance company is in unchartered waters as it is straddled with bad debt which, ironically, is not from its insurance business but from its lending or credit operations.

The situation had reached such an extent that until recently its Non Performing Loans (NPL) reached 52 percent of its total lending of around Nu 18 bn.

The RICBL CEO Karma said that they are working hard to reduce the NPL and have brought it down to around 40 percent so far with the final target being 25 percent by the end of the year.

Financial Institutions (FIs) typically bring down their NPL levels by December end with active follow ups, but none of them has an NPL as high as RICBL. As a comparison, the Bank of Bhutan currently has an NPL of around 4 percent which it is working to actively reduce by December end.

The gross NPL ratio for all FIs in December 2018 was 10.43 percent and even then RICBL had the biggest NPL among all FIs at 27 percent.

The high NPL of RICBL in 2018 led to the RICBL making a loss of Nu 1.4 bn as it had to book its profits and also capital against the amount of NPL as per banking norms by RMA.

The majority of the NPL comes from the overdraft facility accounts given to contractors.

The top three credit portfolio of RICBL is Business OD, Contractor Revolving Credit Scheme (CRCS) and Industrial Loans.

The NPL of RICBL is focused on the first two sectors which are mainly OD accounts and the defaulters among them are again mainly contractors.

A RICBL official said that the contractors are defaulting mainly because there are not enough capital or construction works from the government. The official said that another issue is that too many contractors are bidding for lesser jobs and so contractors end up doing works either with a minimal profit margin or even at a loss and thus cannot payback their loans.

However, the question also arises of why other Financial Institutions don’t have the same magnitude of the problem as RICBL.

This is where RICBL’s own credit policy and due diligence comes into question.

The RICBL is the only FI that gives such special schemes for contractors. It had started the CRCS scheme in 2010 that gave an OD facility specifically for contractors.

However, over time, there was lax due diligence in giving such ODs and even controversial decisions that helped create the present crisis.

A major contractor, on the condition of anonymity, said the loan parameters were quite relaxed for contractors in RICBL.

The relaxation even went to the extent that if a contractor got a government work then RICBL would give an OD of up to 50 percent of that work without collateral.

Normally if a FI has NPL then it can still recover a significant amount from the collateral, which is usually several times the value of the loan.

However, the deep worry within RICBL is that in quite a few cases especially in the CRCS category there may not be enough collateral to recover the NPL loan as ODs had also been given against government works.

Another problem is that even where there is collateral, which is usually land, there are not enough buyers.

A RICBL official said that bidders during auctions are not interested in buying rural land and they don’t seem to have money to buy land even in urban areas like Thimphu. “Maybe the Thimphu land is overpriced but even auction plots in Thimphu go unsold these days,” said the officer.

The RICBL is currently focusing on its 20 biggest NPL accounts who make up around half the NPL and most of these are contractors.

An official said that even if one takes the top 40 NPLs then it would still have a majority of contractor defaulters.

While contractors make up the main defaulters there are others too. One category are vehicle dealers who have taken Business OD accounts with RICBL but are having a tough time keeping up payments due to drastically reduced vehicle sales. Some are engaged in the real estate business and are having difficulty selling apartments and buildings.

A former banker in the know said that most of these issues had come up during the time of the former management who should have exercised tighter controls.

The above developments have led to two sharp credit downgrades in RICBL’s credit ratings in 2019 itself by AM Best, an international rating agency that focuses on insurance companies worldwide. RICBL, from 2013 onwards, had agreed to be rated by this agency.

AM best until 2018 had assigned RICBL a B+ (Good) Financial Strength Rating and bbb- (Stable) issuer credit rating.

However, in 1st March 2019 AM Best downgraded the Financial Strength Rating to B- (Fair) from B+ (Good) and the Long-Term Issuer Credit Rating to “bb-” from “bbb-”.

There was more bad news in 27th September 2019 when AM Best gave another downgrade to RICBL.

AM Best downgraded the Financial Strength Rating to C (Weak) from B- (Fair) and the Long-Term Issuer Credit Rating to “ccc+” from “bb-”.

AM Best has ratings from A to D and C is weak and is assigned to insurance companies that have a weak ability to meet their ongoing insurance obligations. It says the financial strength is very vulnerable to adverse changes in underwriting and economic conditions.

AM best said the rating downgrades reflect a deterioration in AM Best’s view of RICB’s balance sheet strength and operating performance fundamentals.

It said the company continues to exhibit a very high concentration of exposure to retail and commercial loans in Bhutan, with the performance of these assets in part correlated to economic conditions in the country.

“In addition, concern has arisen regarding the company’s ability to strengthen its capital adequacy in a timely manner and comply with local regulatory solvency requirements on an ongoing basis. As at year-end 2018, the company’s regulatory capital adequacy ratio was below the minimum requirement. Regulatory restrictions and intervention have not occurred to date; however, this risk remains over the near term,” said AM Best.

It said that while RICBL’s insurance operations remain profitable, its credit finance business has materially impeded overall operating results. AM Best said that there is a potential for further deterioration in these key rating fundamentals.

A credit rating is an agency’s ability to fulfill its credit obligations in terms of repayment potential.

The RICBL on 15th November 2019 communicated to AM Best to opt out of the ratings system.

With such huge issues on its hands the RICBL is working to try and make a turn around.

A RICBL official said that RICBL has stopped giving OD loans from 2019 and under the CRCS ODs are given very selectively now to contractors who have good profit margins and there are tighter controls. RICBL is also going all out to collect loans and interest from defaulters. It has also come up with loan refinancing and tighter controls.

RICBL CEO gives the big picture

The current RICBL CEO Karma who formerly headed the SAARC Development Fund took over in April 2018 after the former CEO Namgay Lhendup and Executive Director Sonam Dorji were suspended by ACC in July 2017 over collusive practices in the Nubri Capital case and were removed by the board after that.

The CEO gave three main reasons for the current problem. He said the first reason was that there is too much debt in the economy but the capacity to pay back or service the debt is weak.

He said the second reason is that RICBL’s own loan appraisal was not strong and loans were given with the confidence that the person taking the loan would be able to make profit. He said the issue started from 2010 and was building up from then but somehow it was massaged and managed but now the ‘cows are coming home.’

He put the third reason down to the irresponsibility by borrowers. He gave the example of a person who bought four trucks after taking loan from RICBL and he sold two of them without informing RICBL and RSTA allowed the transfer of ownership even though the ownership was with RSTA.

However, the CEO said that it was also a deeper structural issue for RICBL.

He said that insurance companies in other countries have various options for investment in the form of government bonds, triple AAA rated companies and securities but this is not the case in Bhutan.

He said so when RICBL took in large amounts of money in the form of insurance and other products then the most feasible way for RICBL to give returns on that money was to lend it out to borrowers.

The catch here was that RICBL was at a disadvantage as its cost of funds of 7 to 8 percent was higher than banks which had lower cost of funds.

So given that RICBL had higher loan interest rates than banks it usually got clients who had not been accepted by the lower loan interest banks. But RICBL had to lend somewhere and so these people became a part of the client base.

Another issue the CEO said was that while 80 percent of RICBL’s business was credit only around 20 percent of its staff was handling it. He said apart from only a few people handling credit there were due diligence issues and not enough checks were done with the same loan officer looking at both business and legal issues.

The NPLs started piling from 2010 onwards itself, but one way that RICBL avoided high NPLs in the past years was to give additional loans to the same clients to pay the interest component of the loans.

So while this ensured NPL was low it just passed on a problem that grew in size each year to the next year. It also led to a single person having multiple loans.

Given that RICBL was competing with the booming banks its own funds were not enough and so it borrowed money by either floating bonds (Nu 2.5 bn) at 9.5 percent interest rate or taking money from other banks at 9 percent interest and giving out loans at 11 percent.

RICBL, to attract more funds and business, also came up with schemes that gave 11 percent interest a year for monthly deposits.

It somehow all went along, as long as the economy was booming and loan interest rates were high. RICBL also made high profits in these years and staff got up to five months of bonus.

However, the first shock came in 2016-17 when the Minimum Lending Rate policy reduced loan interest rates and suddenly RICBL was left holding a lot of very expensive funds which could no longer be given at higher interest rates.

Another hit came in 2018 when a long transition process for a new government meant no capital works and so the banks biggest clients who are contractors defaulted in a bigger way. This increased in 2019 as again there was not major capital or construction works.

Till 2017 end the NPL had been managed and massaged in part by giving new loans to the defaulters and so the NPL in 2017 December was 6.25 percent only.

However, RICBL’s old bad habits and passed on problems caught up with it in a big way in 2018.

A new factor was also a new CEO in Karma who did not allow the old practice of giving new loans to cover up old loans.

The CEO said that in 2018 April he came in at a moment of transition and though he knew there were issues he did not know it was that bad. The CEO was reassured by some of his staff that NPL would come down by December 2018 but it did not and was instead a record high of 27 percent.

This was when the full extent of the crisis in RICBL became known to the RICBL management, its board and the RMA. The nature of the problem can be known from the fact that many RICBL staff themselves were surprised with the real state of the company’s finances.

Rebuilding RICBL

After the December 2018 shock the CEO who comes from a banking background (RMA, BNB and SDF) ordered a thorough assessment of all the loans and issues around them, including by internal auditors.

He said that he gets a regular report and each time he discovers knew things which were hidden or not known before.

One of the first steps to tackle the issue was to increase the number of people handling credit in RICBL to now 80 with a credit officer in each branch. He said that earlier the loan assessment from both the business and legal side was done by one person and it was more a process then an actual check.

He said now the credit officer has to be much more thorough, including visiting the actual place of business, and he said the legal aspect is handled by a different and now large legal team.

He said loan operations and risk management have been separated and while loan disbursal has been decentralized it has to check in with the risk management team in Thimphu. Loan disbursal will also undergo much more thorough due diligence.

“Earlier people said they came by morning and got loan by evening from RICBL, which is not correct. Now it will take a longer time than before,” said the CEO.

To get rid of expensive funds RICBL has returned its borrowings from banks which saved it Nu 200 mn in interest payments. It is also buying back its 9.5 interest rate bonds from the market to avoid paying higher interests for a longer period.

After the December 2018 shock the CEO put in place a dedicated six-man team named Prompt Remedial Action Plan focused on NPLs and they worked on the issue for four to five months which dug up more into the issue and more and more NPLs surfaced.

By August the NPL was still not going down and so the CEO put in place Project NPL with 11 members including all General Managers to deal with the issue. The 13 head of departments of RICBL have been given 50 loan accounts each to handle and one finishing 50 accounts they are given another 50 loan accounts.

The RICBL has also carried out cost saving measures within it and saved another nu 200 mn.

The CEO said when the RICBL employees learned of the extent of the problem they immediately proposed to do away with the board approved HR budget of Nu 38 mn and so this year no RICBL staff has travelled out of the country.

The CEO said he was touched by such gestures of the RICBL staff who are all determined to turn around the current situation for the company.

He said that RICBL is carrying our root and stem measures to change the entire system in RICBL and improve it. The CEO himself is personally training credit officers. The RICBL will also ensure that staff are given relevant and enhanced trainings.

The company is even bringing in new software to be able to better asses the credit worthiness of people seeking loans.

In terms of loan recovery, the CEO said that the effort is not only recovery but also look at rehabilitating lenders who may be genuinely unable to pay now due to a business downturn but can pay in the future.

He said that the RICBL target is reducing the NPL to 25 percent by December end and he said the company is working hard to achieve that target.

RICBL is an enormously important Financial Institution in Bhutan. It handles around 400,000 rural and other life insurances schemes, insurance of 30,000 to 40,000 vehicles, all major equipment, hydro projects, buildings etc. It is also Bhutan’s largest re-insurance company.

RICBL is also where private companies park their provident fund accounts of their employees.

39 percent of RICBL is owned by the government through DHI while the rest are held by private and institutional shareholders.