A Ministry of Finance report outlining a short to medium term recovery plan for the economy lists various measures being taken by the Royal Monetary Authority (RMA) to pump in billions in liquidity into Financial Institutions.
The end result for this means that there should be more money for banks to lend out at a time when the economy has been deeply impacted by COVID-19, and one of the main demands of the private and corporate sector is more loans to either tide over the crisis or make make new investments.
The report says that in order to provide adequate liquidity in the banking sector, the RMA has lowered the Cash Reserve Ratio (CRR) by 3 percent injecting Nu. 4.22 billion liquidities in the economy. The RMA may resort to lowering CRR if there is persistent liquidity shortage in the economy.
The CRR of a bank is the 10 percent of its total deposits that it has to deposit with RMA and so normally banks cannot lend out or earn money on it.
A banker said that the RMA in total holds around Nu 14 to 15 bn in CRR and the understanding with the RMA is that if there are any good investment avenues and liquidity is needed then RMA would lower the CRR further to release more cash.
The RMA will also be reducing the Loan to Value ratio (LTV) to allow more money to be lent out.
Currently if somebody is eligible to get a Nu 100 loan based on his assets, the bank only gives around 70 percent of the that value. The aim is to increase it beyond 70 percent and make it 100 percent.
To provide adequate capital for the financial institutions the RMA has relaxed the Capital Conservative Buffer by 2.5 percent, which helped to create an additional capital buffer of Nu. 10 billion. This will help Banks to inject more liquidity in the market.
A banker explained that all banks have to have a 10 percent Capital Adequacy Ratio (CAR) which is essentially to see if the bank has enough capital against its credit exposure risks to be able to take certain losses.
So a bank could have a lot of deposits but if it does not have enough CAR then it may will not be able to lend out those deposits.
After the 2008 Financial Crisis and subsequent global banking reforms an additional 2.5 percent was added on this 10 percent CAR called the Capital Conservative Buffer which was to reinforce the CAR.
So by reducing the buffer or the overall CAR the RMA while not putting in money directly into the banks is giving it the ability to lend out much more of its deposits.
This is important as an earlier report by the paper showed that certain banks like BoB, Druk PNB and Tashi Bank had enough deposits to lend, but they did not have adequate equity or Capital Adequacy Ratio (CAR) to be able to lend out the deposits. This will now free up that lending space freeing up billions in loans.
The RMA has also considered revision of the existing risk weights of assets of the financial institutions.
Risk Weights of Assets simply means that every loan or investment done by the bank is assigned a risk percentage and based on this the bank has to have adequate capital. It is an important factor in calculating CAR.
So if the risk weights are lowered then it again lowers the capital required for a bank and this again frees up billions more for lending.
In addition to this, the RMA has also come up with a Domestic Liquidity Management Framework to manage the liquidity of Financial Institutions.
A banker said that normally banks borrow from each other to meet liquidity requirements but when this is not possible then under this framework they can borrow from RMA.
RMA said that in preparing to revitalize the economy to boost domestic production, the RMA is committed to ensure undisrupted flow of liquidity in the economy at all times and promote effective management of liquidity in the financial system. The DLMF will provide both deposit and lending window facility for the banks ranging from overnight to weekly and further to long term liquidity operations.
To strengthen the overall financial intermediary function of the banks, the RMA said it has put utmost importance to promote a new credit culture, by decongesting the balance sheet of the banks and develop a high quality human resources capability in delivering financial services.
The decongesting of the balance sheet of the banks is to do with dealing with the Non Performing Loans where NPLs that cannot be recovered and are wilful will be facilitated in a fast track manner through the courts, those that can be recovered will get time extension to pay and new NPLs will be given incentives to not stay or come in the NPL bracket.
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