NPL issues solely in the Courts of RMA and FIs

PM says that while the government is ready to talk with the RMA and FIs on the issue concerning the six month cooling period and others, the government has no authority over RMA and FIs

While private business houses, especially those in the construction industry are reportedly facing several problems, because of the Royal Monetary Authority’s (RMA) directives issued to banks that non-performing loans (NPLs) that have become performing shall be placed under “Observation Period” for six months, Prime Minister (PM) Dr.Lotay Tshering in a virtual meet with the media on October 14, 2022 said that the government is ready to talk with the central bank and FIs.

However, he added that if the latter two decline, the cooling period cannot be done away with as it has no authority over RMA. The PM also shared that the government has written to the RMA, particularly related to guarantors.

In addition, the PM said that NPL in Bhutan is one of the highest in the world. “When the NPL in the world remains 2% or 3%, the minimum NPL in our country is 7%, 8% and some have even reached to 14% and15%,” he said, adding that such high NPL rate with our banks, does not reflect back well on our economy and capital market system.

“Rather it only says the money flowing in the market is not very efficient,” the PM said, while adding that the government’s job is to make the capital market system very efficient.

The PM further mentioned that they can do away with the cooling period of six months if RMA and financial institution are willing to talk. “If they don’t want to talk or listen then it can’t be done away with as the government has got no authority over RMA,” he said.

The PM also said that there isn’t much problem in keeping the cooling period for six months. He underlined that during the cooling period, the FIs can study the strength of the borrowers to repay, based on which further changes to make the system efficient can be made.

Meanwhile a contractor said that while the RMA may have its own reasons, he still sees no rationale in it. “Why the six month cooling period? We don’t see any rational as there is no guarantee that even after six months, businesses will run smoothly,” he said, adding that businesses are subject to circumstances and external factors.” “We never know when our businesses will go under NPL as we don’t know what will happen to the viability of the business,” he underlined.

A financial expert also said that if one has paid and cleared the NPL the borrower should be eligible for bank guarantees. “We don’t see why RMA should be stringent as the loan in our country is fully secure. It is just that we have to strengthen the legal system, recovery system and the process,” he said.

He added that there are different types of defaulters. “Some are circumstantial defaulters, due to which they are unable to pay. Then there are wilful defaulters who have the capacity but don’t pay,” he said.

According to him, rather than imposing the cooling period, it is better to be stringent with wilful defaulters. “For the circumstantial defaulters, it is good as long as the NPL is cleared,” he said, adding financial institutions should instead support circumstantial defaulters. “The s month cooling period will just strangle those businesses that depend on financial institutions,” he said.

Meanwhile, another contractor said that the cooling period will also affect the funding capacity of businesses and encourage unorganised money lending as people will borrow from money lenders. “The interest will be very high, which will affect the economy of the country and promote unorganised market,” he said.

As mentioned by the PM, Lyonpo Namgay Tshering, minister of finance (MoF) had written a letter to the RMA dated 15th September 2022. The letter says that the MoF extends its full support to RMA specifically on the observation period that an individual loan defaulter has to undergo which is aimed mainly towards ensuring that the repayments by the borrowers are made on a continuous basis through genuine sources and not by sanction of new loans.

“However, applying the same principle (6 month observation period) for those individual who stands as a guarantor of a loan requires careful review and considerations. This is based on the fact that the guaranteed amount or the collateral provided by the guarantor in itself serves as a risk mitigating from my any financing options,” the letter reads.

The letter requests the RMA “to kindly review and reconsider the aforementioned issue in keeping with the board economic objectives and vision.”

In a letter dated October 10, 2022, the RMA had written a letter to all FIs clarifying the directives on treatment of NPL. The letter, amongst other states the NPLs that has become performing through repayment made by the borrower shall be placed under the observation period for six months.

Similarly, the letter says no bank guarantee, letter of credit and other off-balance sheet (OBS) items shall be granted to the NPL borrowers that are placed under the observation period and six month observation period shall be applicable even for the closed NPL accounts.

Sherab Dorji from Thimphu