The Royal Monetary Authority Governor, Daw Tenzin focused on the rupee shortage and the credit crunch in the RMA Annual Report released this Monday. The report covers the financial year of July 2011 to June 2012.
Referring to the measures taken in light of the rupee and credit crunch the report says, “The RMA, in collaboration with the RGOB over the past ten months has implemented numerous major demand-side monetary policy, currency exchange and financial prudential measures to rein-in aggregate demand and tackle structural imbalances in the economy.”
The Governor in the report also said these reforms may have been unprecedented but timely, and that much still remains to be done to strengthen Bhutan’s macroeconomic fundamentals. The report said after the short-term interventions, it was time for targeted long-term policy measures which must be phased in and carried out in the real and fiscal sectors to promote and boost domestic productivity and employment.
Banks are safe and liquid
Reassuring the Bhutanese public over increasing concerns on the health of Bhutan’s financial institutions in the light of the above two problems the governor said, “I would like to reassure the Bhutanese public that the domestic financial system remains safe, sound and resilient.”
He said that Bhutanese financial institutions, under the close supervision of the RMA, continue to meet and uphold all safety prudential norms and requirements.
“Reviewing key financial sector soundness indicators for the period ending June 2012, Bhutanese financial institutions on average maintain well above the required prudential limits on capital adequacy and liquidity, while enjoying improvements in asset quality as reflected in their gross Non Performing Loans ratios,” said the governor.
The governor in his report said that a joint assessment of banking sector liquidity reveals all financial institutions to be in a comfortable position to meet their loan obligations.
“There is adequate liquidity for the financial institutions to meet current sanctioned loans and commitments; liquidity will however be tight for the medium-term when it comes to new loan applications and the pace of lending shall be left to the individual discretion of the financial institutions in line with availability of loan able funds,” said the report.
The RMA said that to address the liquidity issues it had reduced the Cash Reserve ratio for banks from 17 percent to five percent in 2012 which pumped in Nu 5.99 bn into the banks.
As of September 2012, out of a total of Nu.76.88 billion committed loans (of which banks have sanctioned a total of Nu.58.08 billion), Bhutanese financial institutions have disbursed a total of Nu.68.44 billion (of which banks have disbursed Nu.50.62 billion), leaving a total of Nu.8.44 billion to be disbursed (Nu.7.46 billion remains to be disbursed by banks), at varied intervals.
The report said that commercial banks now have adequate funds to meet all disbursement obligations on committed loans. As of September 2012, banks held surplus liquidity of Nu.2.03 billion. “The RMA shall continue to do what is necessary to guarantee that financial institutions have access to corresponding Rupees to support committed lending,” said the report.
It says that though surplus funds at the moment may be locked-in for previously sanctioned loans, timely loan recoveries and gradual improvements in their liquidity status, shall enable banks to have access to additional loan able funds for new loan applications. At present, sources of funds for both financial institutions and public and private enterprise remain limited, with much of the injected short-term liquidity unavailable for long-term lending.
According to the report the Ngultrum liquidity crunch has also helped identify critical systemic weaknesses for correction in the current banking model.
It says, ‘there still continues to be a large build up of asset-liability mismatch in the banking system which poses challenges for liquidity management’.
The report says that Banking sector liquidity constraints can be attributed to persistent growth in Indian Rupee imports with an equivalent drain on local currency liquidity; a reduction in general deposit levels held with banks and over-dependence on corporate deposits which are limited and more volatile and seasonal in nature; as well as continued heavy reliance on bank-based capital to finance long-term public and private-sector investments and large projects rather than tapping alternative finance from the capital market.
“It is hoped that promoting alternative finance options from the capital market through equity and bond issuance could provide alternative means to avoid the maturity mismatch on the balance sheet of banks in Bhutan,” says the report.
Impact of Credit Crunch on growth
The report says that for those concerned about the impact of the current banking sector liquidity crunch on growth activities, the strength of recovery in Bhutan’s banking sector liquidity will depend critically on developments in financial institutions’ asset-liability management and broad based expansion and mobilization thereof of savings. Recovery will also depend on the likelihood that the demand for and supply of funds will move in tandem and on the vigor of local industry to generate revenue and savings. However, going forward, risks associated with the asset-liability mismatch and potential drawdown of corporate opportunistic deposits for new corporate investments still prevail and shall pose the greatest near-term risk to recovery.
As a result of increasing overdraft and line of credit facilities availed from India, for the year ending June 2012, Bhutan availed a total of Rs 40.5 billion under the SBI Over Draft Facility (ODF); correspondingly, the RMA incurred Rs 666.2 million during the year towards interest payments on the GoI Line of Credit and Over Draft Facility.
The report says, “While it is highly costly, we will continue to source such short-term financing in order to support the financial system and to minimize disruptions to economic activity.”
But there is also caution urged as the report says, “Yet, it remains clear that as a central bank, the RMA cannot solely resort to injecting liquidity through short-term borrowing especially when that borrowing is costly; when liquidity injected converts to imports, largely non-productive and non-income generating; results in widening external deficits; and thereby depleting reserves further. Similarly, short-term liquidity injections through reductions in reserve requirements (CRR or SLR) would only exacerbate current risks transmitted through increased levels in long-term lending.”
The report hinting at future measures to control demand says “Since inflationary pressures still constitute a serious risk to Bhutan’s medium-term(economic) outlook, the RMA shall move forward with credit and demand management controls; the RMA will soon be re-evaluating the policy rate in line with credit activity and other macroeconomic developments.”
According to the report Bhutan has experienced is first ‘bubbly experience’ of asset price escalation, excessive credit accumulation and consumption. It says in other places the bubble are more severe but due to the limited degree of speculation and less sophisticated nature of financial markets in Bhutan, the adverse impact on the real economy has been minimized.
It says that the past year has served as a reminder to Bhutan that an aid, debt, fiscal and import driven economy with growth built up from debt and consumption can be highly unsustainable.