FM concerned about negative impact of RMA regulation

FM concerned about negative impact of RMA regulation

In a letter to the RMA Board, the finance minister (FM) has requested for reassessment of situation at the ground and to come out with  more practical solutions

In yet another development concerning non-performing loans (NPL) and the cooling period imposed by the Royal Monetary Authority (RMA), the minister of finance, Lyonpo Namgay Tshering has called upon the Board and RMA management for re-assessment of the issue and possible development of a differentiated approach.

In a letter to the RMA Board dated January 25, 2023, the finance minister has said that though there is acknowledgment and appreciation for reform initiatives undertaken by the RMA to streamline financial services in the country, the minister is equally concerned “regarding the application of prudential regulations, particularly the application of cooling period for loan defaulters, irrespective of the severity and duration of the default.”

Earnestly requesting the Board to reassess the ground realities, the minister has written about Bhutan’s economic downturn. “As we are confronted with an economic downturn and are still struggling to heal after the pandemic, my earnest request to the board is to reassess the ground situation stemming out of this prudential norm, and come out with more practical solutions, so that we don’t ground the business prospects,” the letter reads.   

The minister has also said that though he appreciates the need to build a better credit culture and inculcate a sense of discipline among the borrowers, he is also “deeply concerned with the negative impact” that the regulation is having on business entities, especially in the construction sector. Lyonpo also added in his letter, that he is hopeful that a thorough assessment of the ground situation has been undertaken in close consultation with the business chamber and allied private sectors.

The finance minister, has thus, called upon the Board and RMA management to reassess the issue and possibly, “develop a  differentiated approach to observe the cooling period depending on severity and duration of default by the borrowers. ” If not, Lyonpo has expressed that there is a huge risk of dragging performing business into ‘watch’ and ‘loss’ categories of NPL.

The finance minister met with representatives of the private sector on January 3, 2023, after the private sector stakeholder meetings on December 27, 2022. After the meeting on January 3, 2023, Lyonpo clarified to the construction association of Bhutan (CAB) that it is untrue that the government and RMA is adamant about not lifting the observation period for NPL. He had said that instead, the matter would be resolved using a “differentiated approach” rather than a “one size fits all” approach.

Meanwhile, those in the construction sector see a ray of hope. “The construction sector is different from other sectors and it is not unusual for a contractor to enter into NPL. This time, it was a hard time as it became impossible for contractors to even function. However, we are happy and are hopeful of some positive outcomes from Lyonpo’s letter to the RMA Board,” CAB’s executive director said.

The country’s construction industry, severely affected by the COVID 19 pandemic has been hit hard after the central bank came out with the cooling period regulation. A loan that has not be paid for 90 days or longer is considered an NPL. According to the RMA directive, everyone who has NPL must go through a six-month cooling-off period during which they are not eligible for credit from any financial institution (FI). Even if one pays the NPL, the cooling period stands.

Contractors say that due to this, several issues have erupted that have destroyed all means for them to even partake in bids. For one, bank guarantees (BG) required for bids cannot be obtained once one falls under NPL and the cooling period. Underlining that RMA’s regulations on NPL also make contractors unable to work, contractors had also questioned how they could repay, without any work in hand.

One contractor told the paper that ultimately it is the people who are losing. “Money in the FIs belong to the people. As I cannot pay my loan because of NPL, the next step would be litigation and ultimately I may be locked up. Who loses; it is the people,” he said.

On the current letter by the finance minister, he said he is not very optimistic about the outcome. “Everyone says they are doing their work, including the RMA and that there are rules to be followed. We understand this; but in the larger interest of the country, there ought to be some lee-ways,” he said, adding that contractors are grateful to the finance minister.

Meanwhile, on January 20, 2023, the finance minister issued a notification to procuring agencies on payment of bills/claims within the stipulated time. The letter asked all budgetary agencies to clear bills and claims as per the Finance and Accounting Manual 2016. The letter states that budgetary agencies will be held accountable for non-compliance to the notification. This notification also followed after the contractors voiced their concerns about the delay in payment by procurement agencies.

Tshering Pelden from Thimphu