Banks are happy about the move but want the RMA to increase the cap on housing loans
After floating the draft guidelines on Housing, Vehicle and Consumer loans last week, the Royal Monetary Authority (RMA) has now announced that it would allow banks to reopen Housing, Vehicle and Consumer loans by mid August 2014.
RMA Deputy Governor Pushpa Lal Chhetri said, “The RMA Board has already given the go ahead for opening up these loans but we will make one more presentation to the Board before finally going ahead.” He said by the time the RMA would also have gotten feedback from the public on the draft guidelines.
The draft guidelines currently impose a Nu 20 mn cap on commercial housing loans, Nu 3 mn cap for a once in a lifetime home loan and Nu 500,000 cap on consumer loans. It also has other financial and technical guidelines to ensure that the person taking the loan can repay and there is also minimal risk for the bank.
In the light of the rupee crisis the RMA in March and April 2012 had taken various measures including issuing a directive to all banks to stop giving the three categories of loans. In addition to this the Central Bank increased the Credit Risk Weightages on loans by 150 to 250 points making it impossible to give loans as banks could not match such high risk weightages.
The Deputy Governor said that the banks had already been consulted on the draft guidelines and even the staff of the banks will be given some training to cope with the new guidelines.
The banks are currently in a condition to loan out money as the total liquidity (money available) of all the banks as of July 2014 stand at Nu 15 bn. The capital base and liquidity of the banks have been strengthened with the government recently pumping in Nu 2.1 bn through the Economic Stimulus Plan into all the banks.
However, apart from the banks above the opening of credit would also allow other non banking financial institutions like RICBL, NPPF and BIL to also give limited credit. NPPF, for example gave housing loans to its members before the ban.
It has also been learnt from a private banker that the RMA will significantly drop the Credit Risk Weightages down to 50 points making it also much easier for banks to lend in the housing, vehicle and consumer loan categories.
Pushpa Lal said that the RMA took the decision to allow loans on the back of the government’s fiscal measures of approving the Tax Bill in the Parliament. He said other factors were looking at the health of the financial sector, the need to give credit to the productive sectors of the economy to
generate growth and employment and also the fact that any monetary policy could not be a long term solution to economic issues.
He said in the past the RMA had to take unconventional measures since the current account deficit was huge, there was severe shortage of rupees and there were no fiscal measures.
Explaining the more than two year timeline of the monetary measures, Pushpa Lal said that it was never meant to last this long but was extended due to a long election process in between when there was no government.
Sounding a note of caution, the deputy governor said that the situation was still vulnerable which was why the loans would be opened but with adequate macro-prudential guidelines so that the stability of the financial sector would not deteriorate. He said that the government should also be cautious in its expenditure front especially on current expenditure and also on the capital expenditure as they would lead to rupee imports.
The deputy governor said that the opening of the loans would impact the rupee reserves, and so in the long term the government apart from taxation and controlling expenditure should come up with measures to generate rupee.
He said the focus should be in areas like hydropower or ‘liquid gold’, agricultural import substitution, tourism and others to earn rupees.
Currently Bhutan’s rupee reserve is at Rs 8 bn but most of it would be going towards financing hydropower construction imports. Bhutan also owes the Indian government Rs 10 bn in rupee loans at a concessional interest rate of five percent.
Pushpa Lal said, “The fiscal measure taken by the government through the Tax Bill is a very good, bold and farsighted measure but having said this there are still some grey areas and loopholes like zero tax items like for e.g. rice which should also have some minimal taxes.” He said that this would help increase transparency and also help to manage imports.
Pushpa Lal said that RMA’s responsibility was to safeguard financial stability and inject credit in a safe and prudent manner so that the economy would benefit along with the borrower and lender.
According to RMA the Central Bank cannot be involved in micro-managing aspects of the economy and banks also had to take more responsibility.
On reservations in some sections about opening up home loans especially in Thimphu, Pushpa Lal said that the RMA cannot frame monetary policies just to benefit a few but it must be for the larger overall economy. He said if people could afford it and if banks were satisfied that they could repay then people have the right to take home loans to build their own homes.
The deputy governor commenting on the guidelines said that once finalized they would be compulsory for the banks to follow. He said that some guidelines like debt equity ratio was already being practiced but others like ‘loan to value’ ratio and ‘loan to income ratio’ were brought in as part of the international best practices after the global financial crisis.
Pushpa Lal said that the Banks would determine the interest rates for these loans, but the RMA to ensure sustainable financial practices since 2012 had set minimum basis points below which an interest rate could not be given.
He said that given the current account situation and also the rupee generating capacity to meet total consumption the RMA would always maintain a tight monetary policy until such time the real economy could generate some production.
Meanwhile though the banks are happy that RMA is opening up these three sectors there are some reservations especially on the loan caps set in the guidelines.
A senior banker said the other regulations are okay as they can implement them and some already exist but the caps especially on the housing loans are too low.
He said, “In reality commercial loans for housing go from Nu 30 to Nu 60 mn and there is even one with Nu 70 mn so the Nu 20 mn cap is inadequate. Even the Nu 3 mn cap for a residential house is too low as the real cost of construction can go up to Nu 10 mn or more for a residential house.”
The banker said that the other problem was the regulation that such a building or an asset once built could not be used to get other loans.
“If the cap is not increased and if such a restriction is not removed then it would be difficult for banks to lend sufficiently and it would create a housing shortage in the long run,” he said.
The Financial Institutions Association of Bhutan (FIAB) will be meeting over the weekend to discuss the loan guidelines and its implications on the Financial Institutes.