Bhutan’s Financial Institutions have lent out Nu 130.519 bn till July 2019 which is on the back of unprecedented credit growth in the last few years. By comparison in July 2013 the total credit was only Nu 58.117 bn.
However, a slowdown is in effect with FI’s either turning away customers or becoming very choosy with their credit. This has been caused by the twin impact of a liquidity crunch and growing Non Performing Loans in the overexposed sectors.
As per RMA guidelines the banks are supposed to keep 20 percent of their assets as Statutory Liquidity Ratio (SLR) while it is 10 percent for non banks. SLR is money that is supposed to be in liquid form that is not loaned out.
However as per the Financial Sector Performance Review Report for June 2019 the SLR position of the banking sector stood at 22.62% and 10.48% for non-banks in June 2019.
This is compared to 31.04% for banks and 13.09% for non-banks in June 2018 a year earlier.
Similarly, the NPL is also getting worse for FIs.
The same report says the asset quality of the financial sector has deteriorated with the increase in NPL from Nu. 12.54 billion in June 2018 to Nu. 21.43 billion in June 2019, showing an increase of Nu. 8.89 billion.
It says that analysis on the sectoral NPL of the financial sector for June 2019 reveals that Service and Tourism loans has the highest share with 31.12%, followed by Trade and Commerce with 21.51%, Production and Manufacturing with 11.53% and Housing with 11.4%.
Interestingly the NPL situation has been deteriorating from 2018 itself. The gross NPL ratio (NPL to total loans) of the financial sector increased to 10.43% in December 2018 as compared to 7.98% in December 2017.
The RMA Governor has been silent in the middle of all these developments, until now.
The RMA Governor Dasho Penjore said that if one looks at a business cycle it never goes as desired with an unending boom as there also has to be a fall.
He said there was a good credit growth in the last few years due to the Minimum Lending Rate that pushed down loan interest rates and especially so in 2017 and 2018. Dasho said loan interest rates were reduced with the intention of encouraging loans in productive sectors of the economy.
The Governor said that the FIs now have a big exposure to sectors like hotels due to fiscal incentives and a boom in tourism, transportation due to the boulders business and also housing due to the demand.
He said that with this period of boom there is now a natural period of fall as the banks find that they are over exposed in these sectors.
The Governor said that at one level the banks have lent out a lot of money and so lending capacity has decreased and at another level the banks are showing restraint since they have lent out mainly in a few sectors.
Dasho explained that unlike in the past the RMA has no regulations to force banks to stick to certain percentages while lending to a sector as this was not a desirable international best practice.
He said the banks have the option of pricing the loan interest higher to make credit more expensive but they are not doing so.
With the current trend of tightening liquidity, overexposure in certain sectors, rising NPLs and slowing credit there are an increasing number of business people and observers predicting a major slowdown in the economy.
Other go further and say given the excess number of hotels and low occupancy rates, faltering boulder and transport business and large numbers of housing units the banks may even have to prepare for a possible bust.
The RMA Governor said that while there will be a natural economic slowdown he said that there is no chance there will be a bust of any sort.
He said that on the tourism front the tourist numbers will now switch to higher end tourists with the draft regulations but the numbers will continue to grow and there is still demand for housing.
Dasho said that the banks will take a bigger hit this time than in the past but it would be within the acceptable threshold.
He also clarified that the NPL numbers may seem huge in the middle of the year but the December numbers are much more reliable as the FIs work on making collections and closing their books.
The Governor said that ‘Liquidity Crunch’ is not a correct term as the banks are well within the RMA liquidity norms and there are still large amounts of liquidity that the banks can get from NPPF, bonds and deposits if they want.
According to a source the RMA around three moths ago called the banks, TCB and the Thromde in its office to sensitize the banks on the excess number of hotels and to caution them on over lending to this sector.
Bankers on their end says that a way out of the current slowdown is for the government to do some major investments and open up new avenues of investment part from hotels, transport and housing.