The Bhutanese Leading the way.
The Royal Monetary Authority (RMA) has placed the T Bank under a rehabilitation program that includes a loan moratorium from 3rd May for breaching the minimum Capital Adequacy Ratio (CAR) of 12.50%.
On December 2023 T-Bank’s CAR was found to be 12.21%.
The RMA has also said that T Bank engaged in misinformation on the CAR issue as T Bank misrepresented subordinated debts information.
Section 138 of the Financial Service Act of Bhutan (FSA) 2011 mandates that the regulated institutions shall not provide false, misleading, or incomplete information.
In line with the above the bank has also been fined with a Nu 4.375 million (mn) penalty too.
CAR measures how much capital a bank has available. The purpose is to establish that banks have enough capital on reserve to handle certain amounts of losses, before being at risk of becoming insolvent.
It is calculated by dividing a bank’s total capital by its risk-weighted assets.
CAR has two components with Tier – 1 or Core Capital which includes assets like shareholder equity and retained earnings from disclosed revenues. It is considered the highest quality capital and is used to fund a bank’s business activities.
Tier – 2 or Supplemental Capital includes assets that are of higher risk as compared to Tier 1. It consists of assets like revaluation reserves, undisclosed reserves, hybrid securities, and subordinated debt. While Tier 1 capital is the core capital of a bank, Tier 2 capital serves as a secondary form of capital that complements Tier 1 capital. It is used to absorb losses after Tier 1 capital has been exhausted.
The problem occurred in Tier-2 capital where T Bank failed to do a 20% per year discounting of its Nu 500 mn subordinated debt for some years which made its CAR look better than it was, especially in 2023.
Subordinated debt is the money that the bank raises from the public and other institutions to improve its capital base but under regulations it has to be discounted by 20% every year since it has to be paid back to the lenders with interest.
In December 2023, the T Bank after not discounting its subordinated debt by 20% showed its CAR to be 14.03% when it actually was 12.21%.
The T Bank did not discount the subordinated debt in 2022 and 2023. In 2022 the CAR was still above the minimum mark despite that but in 2023 it slipped below.
RMA is taking action for misinformation as the audited report of T Bank audited by the statutory auditor and given to RMA hid this misinformation. It was found out when RMA started doing the validation of the figures on the ground.
The RMA found breach of regulatory requirements during the review of audited annual returns for the FY 2023 that the T Bank Ltd submitted.
The breaches were deemed significant warranting corrective actions, and the T-Bank Ltd was provided 14 days to respond. The T Bank Ltd acknowledged their lapses on breach of CAR and misrepresentation of subordinated debt.
The breaches according to RMA show weak internal checks and controls.
The Board of the T Bank Ltd has held seven employees responsible and are taking administrative actions on them, and is working on strengthening its internal controls and governance process.
The statutory auditor of T Bank Ltd was referred to the Royal Audit Authority on 3 May 2024 for their review on misrepresentation of subordinated debt.
The RAA empanels auditors and it could remove the involved auditor based on its findings.
The RMA said it reiterates its stance on non-compliance and the importance of adhering to regulatory standards. Regulated institutions that fail to comply with these standards will face appropriate sanctions to maintain the integrity and stability of the financial sector.
In deciding the appropriate penalty to impose, the RMA considered that the contravention constitutes a significant departure from the standard required under the applicable laws in vogue.
Since the T Bank is placed under rehabilitation program, and conditions are Credit moratorium, weekly reporting of capital position from 6 May 2024 and to improve its capital position.
Already as part of its measures to improve its CAR the T Bank on Friday floated Nu 350 mn of subordinated debt to the public for a period of 7 years with a coupon rate of 7% per annum.
The Bank CEO Pema Tshering said that largescale attrition contributed to this as it lost 59 people in 2023 and 30 people in 2022 and so there were certain lapses and certain transactions were overlooked.
He said a capital enhancement plan had already been submitted to the board.
Earlier when the T Bank appealed to the RMA it said there should be no financial penalty under the Prudential Regulations 2017 clause 1.7 but RMA said the penalty is for misinformation and 1.7 is next steps after the CAR breach after they enter the rehabilitation.
The T Bank also tried to argue on other sections like 1.4 and 1.6 but the RMA clarified and reiterated its stance which the T Bank Board subsequently acknowledged.
