Worried bankers discuss bad loans with Lyonchhen

The PM has instructed that all govt payments be cleared within the month to help the banks

11 o’clock Monday morning saw worried heads of all financial institutions trooping in to meet the Prime Minister Tshering Tobgay who had called for the meeting to discuss the non- performing loans (NPLs) of the banks.

Most, if not all, financial institutions have been having a torrid time with the closing date of December 31 approaching when loan accounts are supposed to be paid or updated, and when banks also have a final picture on their NPLs.

Bhutan National Bank Managing Director and head of the Financial Institutions Association of Bhutan (FIAB) Kipchu Tshering, not known for mincing his words said, “The NPLs for all the banks, maybe expect for Bank of Bhutan, about which I don’t know, are all bad. The situation can be called worse than normal times because before the December 31, closing date the situation on loans is supposed to improve but it has not.”

Recent reports by the Royal Monetary Authority (RMA) stated that in the last fiscal, bad loans or NPLs increased by almost a billion, from Nu 4bn in the previous fiscal to Nu 5bn.

Among other factors, many bankers have always maintained that the main reason behind increasing NPLs level with local banks has been because of default on loan payments by contractors who claimed to have not received payments from government agencies, also citing delay in budget release for the fiscal year.

The Prime Minister had called the meeting to find out from bankers, if delay in payment of bills by the government was contributing to the NPL, and also finding a way out for the problem.

The PM during the meeting assured local banks that the government will clear all due payments to business houses within this month on account of government contracts and supplies.

Among other sectors, the commercial banks in the country are one of the worst hit by, what they say is, the delay in the government’s budget approval.

With no payments made by government agencies to contractors, the banks say that the latter are not in a position to make their monthly loan installments for funds availed from local banks. This has caused substantial rise in NPLs with the banks, according to bankers.

A loan becomes bad or non-performing when its interest or principle amount has not been repaid for three months.

Bhutan National Bank’s (BNB) CEO Kipchu Tshering also agreed to the fact that a majority of the defaulters were contractors.

Kipchu Tshering said the bank’s NPL level stood at around 12% as of last month which must be brought down to less than 5% by the end of the year.

He said that NPLs situation is bad due to a combination of factors like delay in government paying bills to contractors, delays in payments to contractors in the Punatsangchu I and Mangdechu project and the sluggish nature of the private sector as a whole.

Since the second Parliamentary elections were held in the current fiscal year (FY), the budget was approved only in October, although the FY started months ago on July 1.

While the government has released budget for select priority activities in the beginning of the FY to ensure government continuity such as the outstanding hydropower loan repayment and dispensing salary among others, government fund for other areas like the construction sectors, and outsourced works to the private sector hasn’t been received regularly.

On the other hand, the commercial banks in the country are still suffering from the backlash of the Indian Rupee (INR) shortfall and the subsequent credit crunch imposed in part by RMA and in part due to a shortage of liquidity with banks. When loans are not available, various economic sectors are hit hard, such as the construction industry that needs continuous flow of funds to carry out various projects on time.

Druk PNB (DPNB) Chief Executive Officer Mukhesh Dave said, “If there are any payments due by any of the ministries or agencies towards the contractors, it has been ensured that they will release it in the next few days.”

“If the payment of the contractors are released our NPL position will substantially improve because major percentage of the NPL has been from the non-payment of the contractors actually,” Dave added.

He said most of the works awarded to a contractor are normally further given to other sub-contractors who have availed loans from the banks. “If those companies do not make payments to their sub-contractors, the issue can be taken up with relevant authorities,” Dave said.

“As of now, our NPL level is doing fine. We should be quite happy and with the government’s ESP plan and other measures almost in place, we are expecting a better quarter next year than what we experienced this year,” he said.

Another reason cited by banks is the slowdown in economic activities which led to meager income or profits from businesses. The rate of NPLs, bankers have said actually increased after the restrictions were put in place.

The impact of an increasing NPL is that high provision for NPL accounts has to be made, which basically reduces the profit of a bank. For example, if a loan of Nu 5mn with an interest rate of 10% goes bad, the interest portion of Nu. 50, 000 per month (10%) shall not be recorded as an income of the bank, but shall be suspended under interest suspense account that falls under liabilities, which affects the profitability of the bank to an extent.

On the other hand, on the principle of Nu 5mn, 100% bad loan provision has to be provided, equivalent to Nu 5mn by debit to the profit & loss account of the bank. This shall reduce the profit by Nu. 5mn.

“The Prime Minister has assured that pending payment to contractors on account of government contracts and supplies will be released within the month to ensure that banks do not carry any NPL on those accounts,” a Bank of Bhutan limited (BoBL) official said.

Kipchu Tshering said that since the Prime Minister had said that he would instruct the Finance Ministry to release all payments, it would be a big help.

Talking to The Bhutanese, Lyonchhen said the meeting was called basically to understand the current situation of the banks given the fact that it’s the last month of the year.

Lyonchhen said he was informed by the bankers that there aren’t as many NPLs except for some large businesses who are defaulting on their loans.

Lyonchhen also said he wanted to make sure it wasn’t the government that was defaulting on payments or had any liability with the banks. “Because the government has insured almost a month ago that any contractor or supplier that has any settlements due with the government would receive their payments,” Lyonchhen said.

However, Lyonchhen also said he needed to see if the NPL issue is “linked to the state of the economy or whether it is because of bad management.” Lyonchhen said he learnt from the bankers that it seemed the problem was bad management by the business houses. “It was a risk taken by the entrepreneur but not because of normal economic forces or conditions,” Lyonchhen added.

Lyonchhen said he told the bankers that the financial institutions are of huge importance and that they have free access to members of the cabinet. “Anything I should do as a member of the government or to take up issues with the RMA, they should let me know,” Lyonchhen said.

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