While the Royal Monetary Authority (RMA) earlier issued a notification to all financial institutions (FIs) on February 28, 2023, revising the terms and conditions of Non-Performing Loans (NPLs), contractors in the country who are under NPL say that the revision does not help at all due to the need to pay off all their loans.
According to the RMA’s notification, the six-month observation period shall no longer be applicable for NPL accounts closed/fully repaid through cash. However, FIs shall put in place proper credit assessment processes to sanction new loans to these borrowers. This means that even if an individual or a firm has entered NPL, they will be eligible to take loans without waiting for the six-month observation period once they repay or clear the loan.
“We do not have the capacity to clear the entire loan and close the account. If the revision had said that we need to clear off the EMIs (Equated monthly installments) that we had not paid, it would have been possible. But we are in such a situation that clearing the entire loan is not possible at all,” a contractor, who did not want to be named said.
He added that typically, contractors’ loans range in millions or billions. “We need the retention money and payments from procuring agencies to clear the loans, but the banks won’t issue Bank Guarantees (BGs) due to the existence of NPLs. It is a vicious cycle,” he said.
Speaking along the same lines, another contractor said it is beyond their means to fully repay the loan given that all their funds are still in ongoing projects overdrafts (OD). “We don’t obtain the withdrawal because we haven’t finished the ongoing job, thus the money is trapped there,” he said.
While capital of the contractors are tied up in ongoing projects, they need to clear their loans before the banks issue the BGs. “However, we can only take out the retention money through the BGs issued by the banks after completing the ongoing project and submitting it to the procuring agency. This makes it impossible for the contractors to repay the full loan amount and come out of the cooling off period,” he said.
“Everyone in the private sector was pleased to learn that the NPL observation period had been lifted, but many people must have missed the final two words of the first criteria, which state, ‘NPL account closed/fully repaid through cash,’ he said.
Another contractor stated that he had cleared all overdue loan interest and installments in December 2022. However, when he approached a bank for a BG, he was refused. The contractor said that the RMA misunderstood their problem. “One of the main issues is the issuance of BGs, and when we enter the NPL, the bank won’t issue the BG, making us unable to function,” he said, arguing that contractors are made to bear the consequences that arose due to the Covid-19 pandemic and other global factors like increased fuel and raw material prices, which are even beyond the government’s means to rectify.
“The Covid 19 pandemic, in addition to higher fuel and raw material prices, are the factors that made us enter the NPL. For instance, when we first put up the tender, the fuel price was Nu 45–48 per liter, but as we got closer to the project, it shot up to Nu 100–123. As a result, the work that was originally going to cost about Nu/INR 40–80 lakhs quickly increased to about Nu/INR 60–80 lakhs, and it is not our fault,” he said.
According to CAB representatives, the situation for contractors is still dire and their NPL issues have not been resolved by the RMA’s updated terms and conditions.
The letter from the RMA has done nothing for the contractors, who are now in a dilemma and at a loss.
“The updated terms mandate that the contractors liquidate the entire loan amount in order for the RMA to lift the observation period, contrary to the contractor’s expectations that it would do so once they paid the past-due loan interest and EMI, (Equated monthly installments)” a representative of CAB said. Subsequently, the revised terms and conditions of the NPL have not provided any solution for contractors.
Contractors submit that they are still struggling to repay their loans due to the lack of BG issuance by the banks. The contractors need the retention money and payments from procuring agencies to clear the loans, but they can only take out the retention money through the BGs issued by the banks after completing the ongoing project and submitting it to the procuring agency.
“We hope that the RMA revises the terms and conditions of the NPL and consider the plight of contractors,” CAB’s representative said.
Tshering Pelden from Thimphu