Royal Monetary Authority (RMA) has lifted the cooling or observation period and made some changes to the directives on treatment of non-performing loans (NPL).
NPL is a loan which has not been paid for 90 days or more.
RMA in the month of September and October laid strict guidelines for NPL to all financial institutions (FI). As per RMA, if anybody enters NPL, they will have to undergo a six month cooling period with no access to credit from any FIs and that is even after you repay the NPL.
This strict guideline was met with huge disagreement from the private sector and business entities, especially the construction sector which was impacted the most. Repeated appeals were submitted by Bhutan Chamber for Commerce and Industry (BCCI) to ease the guideline and the Finance Minister also wrote letters to the Governor.
After repetitive appeals and letters, the guidelines have eased a bit and is business friendly compared to earlier guidelines as of February 28.
As of the directive of February 28 from RMA, the observation period is to be lifted. The six-month observation period will no longer be applicable for NPL accounts that are closed or fully repaid. However, FIs will put in place proper credit assessment process to sanction new loans to these borrowers.
The observation period for those NPLs under the substandard category, NPL due more than 91-180 days, that have become performing through repayments made by the borrowers will be reduced from 6 months to 3 months from the date of repayment.
The 6-month observation period will be in place for NPL accounts that were closed through court proceedings, foreclosure or transfer of the remaining loan outstanding to another borrower. The borrower and the loan transferer will both be subject to the 6 month observation period.
NPLs which are under Doubtful (181- 365 days) and Loss (more than 366 days) category that have become performing through repayments will still be subject to the observation period.
One of the most challenging things to the construction sector with the observation period was not getting the Bank Guarantees or Letter of Credit.
With the new directive, the bank guarantee, letter of credit and other off balance sheet items will not be granted to those placed under the observation period. However, existing bank guarantees or letters of credit that was already issued can be renewed for completion of ongoing projects.
Renewal of overdraft/working capital might be granted by the FIs however credit facilities should be renewed within 90 days from the date of expiry.
During the observation period, no borrowers will be allowed to withdraw the undrawn amount of overdraft/working capital from sanctioned amount.
With the eased guidelines, the president of BCCI Mr. Tandy Wangchuk shared that this is good news for those entities that were genuinely impacted while doing business.