Though Bhutan is still reeling from the rupee crisis and credit crunch it could head into deeper waters if the Central Bank and the Government are not careful.
A 2014 World Bank report titled ‘Bhutan Development Update’ has said that Bhutan’s financial sector has shown signs of vulnerability and weaknesses could be exposed especially after the recent decline in real estate prices. The majority of loans in Bhutanese banks have land as a key collateral whose value has been falling even in key commercial areas in urban centers.
The report says the increase in the loan to deposit ratio to above 100 percent raises concerns, given the overall decline in deposits. Loan to deposit ratio is a commonly used statistic for assessing a bank’s liquidity by dividing the banks total loans by its total deposits. This number is expressed as a percentage. If the ratio is too high which is the case in Bhutan, it means that banks might not have enough liquidity to cover any unforeseen fund requirements like for e.g. a lot of depositors suddenly wanting to withdraw money at the same time.
It says financial sector vulnerabilities also arise from the growing asset-liability mismatches with a significant portion of the deposit base being short term, seasonal and volatile corporate deposits but banks credit is focused on long terms loans like in construction and particularly large infrastructure projects.
It says the concentration of credit in the personal and real estate sector raises concerns as more than a quarter of the financial sectors loans have been given to the building and construction sector followed by personal loans at 16 percent.
It says in such a scenario the recent decline in real estate prices following years of increasing prices may expose weaknesses.
The 2008 Wall Street crash was triggered when the housing or real estate bubble burst and many banks and investors ended up with toxic and devalued assets or debts.
While banks like Bhutan Development Bank Limited give a very low rate of loans on collateral land most other banks have been giving high and competitive loan rates based on the mainly speculative and increasing market price of land in the last few years before the economic crisis hit Bhutan.
An Economist on the condition of anonymity said, “With everyone being focused on the rupee and credit issue nobody is discussing the basic and important issue of the health of our Financial Institutions. Their NPLs are increasing and many figures show their compromised health. All it will take is the collapse of one major bank for it to have a similar impact on other banks as people will lose confidence in the banks and rush to take out their money which banks will not be able to honor due to the huge rush leading to a domino effect.”
Banks are already having problems with an increase in non-performing loans to the extent that even some of their auctions of seized collateral vehicles and other properties are either not successful or have to be redone.
Bankers troubled by the increase in Non Performing Loans had even met the Prime Minister in December 2013 to express their concerns.
The head of the Financial Institutions Association of Bhutan (FIAB) Kipchu Tshering, at the time had said that the NPLs for most banks, were bad and the situation was worse than normal times.
According to figures from RMA the non performing loans for 2013 stood at around Nu 5.5 bn compared to Nu 4 bn in 2012.
Of this people failed to pay Nu 1.5 bn by the end the year signaling deeper problems in the economy and also for Financial Institutions.
“The official NPL figures bad as they look are nothing compared to what will happen if the economy does not recover. There are many big companies who are on the verge of default and owe billions to all banks but still meet their commitments hoping for a turnaround. All it would take is just for some big clients to default which would create a big problem,” said a banker.
Banks in 2013 saw comparatively very poor performance as their profits or profit rates dropped compared to previous years which had seen high and accelerating growth rates.
The RMA had brought in several credit restricting measures from 2011-12 not only due to the rupee shortage but because it observed that many banks had exposed themselves too much leading to a rapid expansion of credit.
The areas which made up the bulk of NPLs were trade and commerce followed by manufacturing or industry, housing and personal loans.
The NPLs could get worse if Bhutan’s economy does not pick up in 2014. Though the World Bank report says that Bhutan’s economy grew by 6.5 percent in 2013 mainly on the back of hydropower construction Bhutan’s real economy is yet to see any benefit of this statistical increase from a low of 4.8 percent growth in 2012. Though the World Bank has projected a higher 7.3 percent for 2014 it is early days to see if the real economy does experience any positive impact from any growth.
Despite the RMA and Finance Ministry’s attempts to free up loans the World Bank report says that monetary conditions need to remain sufficiently tight to ward of overheating and also to manage pressures on the rupee reserves.
It says excess liquidity should be closely monitored and promptly adjusted to prevent credit growth from rebounding strongly. It recommends that in the future along with the development of a domestic capital market increased issuance of treasury bills could be used to mop up excess liquidity. This advice of the bank would run contrary to the current criticism of the Finance Ministry by the National Council and others for restricting credit by issuing T-Bills to finance government expenditure while introducing ESP at the same time to stimulate credit growth.
It also says that rupee inflows related to grants and hydro projects should be sterilized in order to curtail excess liquidity in the banking system.