Slowing domestic credit and Indian economy starts to impact Bhutan’s economy

If the land prices and the building frenzy are any indication, then Bhutan’s economy has been enjoying a period of strong growth since the low of 2012-2013.

However, the good times may be coming to an end or at least slowing down due to a double whammy of slowing credit and overexposed sectors and the slowing Indian and also the global economy.

Ferro, Cement and others hit

Bhutan’s biggest export after hydropower is Ferro Silicone and as per trade figures Bhutan exports around Nu 1.9 bn worth of it a year.

There are around nine factories making the product, mostly located in Pasakha.

Bhutan’s biggest industrial export has taken a hit with an ongoing slowdown in India combined with a global slowdown.

CEO of Druk Wang, Pema Tenzin, said that Bhutan exports around 60 percent of its Ferro to India and another 40 percent to Europe.

He said that the slowdown in the Indian economy has impacted demand from India while the global slowdown has impacted demand from Europe.

With depressed demand Malaysian and Chinese manufacturers have dumped cheaper Ferro in Europe.

As a result, the Ferro business which was seen as the most lucrative industrial product from Bhutan is now selling at around Nu 65 a kilo down from its hey days of Nu 100 to Nu 84 per kg.

Similarly, according to industrialists, a range of industries already suffering from the impacts of GST in India which raised tariff barriers is now being hit with the reduced demand from India.

Another sector hit hard by both the GST slab of 29 percent and now the slowdown in the Indian economy is the cement industry.

Dungsam cement CEO Sonam Jigme said, “Maybe the construction is down in mainland India or the market is not picking up but Indian cement companies are dumping their cement at reduced prices in our main market of West Bengal and to an extent the North-East also.”

The CEO said that in 2017 the company had made a loss of Nu 720 mn which was reduced drastically to Nu 30 mn in 2018 and the aim was to make a profit in 2019.

“However, that looks difficult as we have not done well in the third quarter when we normally do well but our hopes are still high,” said the CEO.

Lhaki cement has around 60 percent of its market in India and is also hit by the slowdown in India. In a statement the company said that the increase of the GST from 14 to 29 percent had already impacted it and now slowing down of the Indian economy also impacted it apart from other advantages that Indian companies enjoyed like transport and cost of production.

The Bhutanese in an earlier article showed that right of the 1970’s any slowdown or boom in India’s GDP has invariably impacted Bhutan given that more than 80 percent of our import and export is with India.

Slowing credit

However, the worry for is not only India as Bhutanese banks who went all out lending in the last few years are now slowing down their loans considerably due to a liquidity issue.

The cement industry along with the steel industry and construction industry are worried about this slowing down of loans by domestic financial institutions in Bhutan.

The Perfect TMX TMT steel company which is a result of the merger of four Bhutanese steel industries (Bhutan Rolling Mills Limited, Bhutan Steel, Lhaki Steel and Rolling Mills and Druk Iron and Steel) is worried.

A spokesperson of the company said that Bhutan’s steel industry is primarily dependent on the domestic market and a chunk of this is private construction.

He said that with the bank reaching their lending limits and facing liquidity issues the steel industry sees slowdown in the coming months and definitely by next year.

The spokesperson said that foreign grant and particularly the Nu 45 bn from India will mean some activity but he said that a lot of activities happen outside this in the private sector and the concern is there.

“The banks will keep financing the buildings they have already given loans to but new loans will become difficult and we will be hit by next year around March when people have to start buying steel,” said the spokesperson.

The two major cement giants who also depend upon the domestic market for a portion of their business said that they are worried about the slowing down of loans in the construction sector as it would affect them.

Lhaki cement mentioned the stoppage of construction loans by banks as a factor that is impacting the cement business.

The Dungsam cement CEO said that all major cement companies in Bhutan are dependent on the domestic construction market and so the slowing down of loans in this sector will also impact the cement industry.

The Construction Association of Bhutan (CAB) President Thinlay Gyamtsho said that there has been some delay in the giving out of major works by the government probably due to the election in Bhutan followed by the one in India which would have delayed grants from India.

The CAB President said that the construction industry is waiting for major works from the government and if they are not given by this year then contractors would have trouble updating their loans with the banks. He said the ADB and World Bank projects are not enough to sustain contractors.

He said that with financial institutions already becoming more circumspect on loans there would definitely be an impact on the construction sector.

Worrying numbers from the banks

The banks are slowing down or even stopping certain loans for two major reasons. The first is a general liquidity issue among the banks given the lending spree in the last few years and the second reason is a high exposure of loans in sectors like housing and service loans.

There is also the related concern of rising Non Performing Loans which also raises questions on the quality of loans.

No bank has publicly admitted it yet but Bhutan’s Financial Institutions are in the middle of a liquidity crunch.

Many clients be they individuals or companies have reported being turned away by FIs while applying for new loans.

A senior BoB official, on the condition of anonymity, said, “There is a liquidity crunch among the Financial Institutions which is why FIs are not able to fund certain overexposed sectors.”

The official said, “In the last few years with the loan interest rates coming down due to RMA’s Minimum Lending Rate (MLR) people went crazy taking loans and constructing houses, hotels and schools. Just a look at the number of new hotels and upcoming hotels within Thimphu will give an idea.”

He said that another issue is that while the loan interest rates went down the deposit rates did not go down and so this added to the liquidity issue.

The BoB official said there is also caution among the FIs on areas like hotel loans as the government policy is to control excess tourists but more hotels are being built in anticipation of more tourists.

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.

As per the RMA’s report in March 2018 the SLR for non banks was 32.47 percent and 13.27 percent for non banks.

However, in March 2019 this declined quite considerably to 22.35 percent for banks and 11.33 percent for non banks showing that FIs are just above the limit and do not have much liquidity space.

The hope from within RMA and the FIs is that the liquidity crunch is a cyclical issue and that once government, corporate and private deposits start picking up by late this year and next years the FIs can lend freely again.

This is also what many bank clients have been told.

The FIs are also betting on the fact that the RMA will not take any measures to curtail credit given the push by RMA to increase access to finance and also fund entrepreneurs and other economic programs.

Another matter of growing concern is that explosion of credit growth in the last six years since 2013 and the related overexposure of certain sectors.

In May 2013 the total credit given by Financial Institutions minus NPPF figures was Nu 55.129 bn but in May 2019 the total credit has reached Nu 128.390 bn which an increase of Nu 73.261 bn or a 132 percent increase in credit.

Similarly, in May 2013 if sectoral credit was looked at Service and Tourism was Nu 6.355 bn and Building and Construction was Nu 15.141 bn but in May 2019 Service and Tourism loan is Nu 31.200 bn and Building and Construction is Nu 31.865 bn. These are the two most overexposed sectors.

But, here again, the position from the banks is that the RMA while providing advice cannot restrict them directly in these areas.

A matter of increasing concern is also the rise of the NPLs of the FIs.

The NPL in March 2018 was Nu 15.56 bn but it rose to Nu 20.02 bn in March 2019. In percentage terms NPL in March 2018 was 14.63% and in March 2019 it became 16.02 percent.

The RMA, despite the above figures, does not seem alarmed and it has not taken any measures to restrict credit even in suspect areas like hotel loans. The Central Bank has instead maintained a stony silence from the press on the above issues.

About Tenzing Lamsang

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