NPLs of FIs dropped by Nu 8.2bn in June

The service and tourism sectors saw a substantial decrease in NPL by Nu 2bn

As economic activities continue to pick up in the country, non-performing loans (NPLs) of the financial institutes (FIs) have dropped from 14.08% amounting to Nu 24.24bn in June 2021 to 8.64% amounting to Nu 16.06bn in June this year.

As of June 2022, the reduction was almost Nu 8.2bn compared to last year, according to the latest financial sector performance report of the Royal Monetary Authority (RMA).

The report states that sectors like service and tourism, trade and commerce, and production and manufacturing saw a substantial decrease in NPL by Nu 2bn, Nu1.8bn, and Nu1.5bn respectively. The quarterly review report highlights the performances of the Bhutanese financial sectors based on reports submitted by the financial institutions.

The study of the loan portfolio shows that the financial sectors have been made vulnerable by the service industry, which has an overwhelming NPL ratio of 32%, mostly attributed to the collapse of the tourism and hotel industry. It is followed by the production and manufacturing sector with 19% and the trade and commerce sector with an NPL ratio of 18%.

However, local economists say the decline in bad loans might slow in the coming months amid the central bank tightening monetary policies.

“NPL ratios continue to dip as cash flows improve now that the economy has reopened,” a local economist said, adding that declining NPL is due to revival of employment and the return of economic activities. This will continue as the country further reopens the economy and jobs resume and the employment rate improves.

“We can expect the NPL to sustain its downward trend but the decline may somewhat slow down with new policy and reforms,” he added.

Meanwhile, the profitability of the country’s five banks and non-banking lenders increased in June this year as compared to the same quarter last year. The profitability (after tax) stands at Nu 4.7bn at the end of the second quarter of this year as compared to a profit of Nu 3.35bn in June 2021.

This is an increase of Nu 1.48bn compared to a net profit at the end of the first quarter of this year, meaning that the performance of financial institutions is improving.

An official from RMA said that the profit was mainly brought about by the decrease in NPL that subsequently resulted in a write-back of loan provision by Nu 906mn. “Financial institutions’ Statutory Liquidity Ratio (SLR) as of June 2022 stands comfortably above the minimum regulatory requirement of 20% for banks and 10% for non-banks.”

According to the RMA quarterly review report, the formulation and application of robust monetary measures from Phases I to III have enabled the availability of relief measures in the form of interest payment support, loan restructuring and rescheduling, and deferment, which have helped in the improvement of the quality of loan portfolio.

The report shows that the income from interest alone increased by Nu 489mn which is from Nu 10.334bn to Nu 10.823bn, while the financial institutions’ interest expenses saw an increase from Nu 5.05bn to Nu 5.6bn.

The financial sector performance report also depicted a similar trend in the capital fund which stood at Nu 27.59bn in June this year, compared to Nu 23.36bn last year.

The increase is Nu 4.23bn this year.

The Cash Reserve Ratio (CRR) stood at 15.55% in March this year compared to 13.31% last year.

In addition, the total loan availed by people at the end of the first quarter increased to Nu 179.5bn, way up from last year’s Nu 169.8bn. NPLs also decreased from Nu 24.75bn to Nu 17.56bn, while the gross NPL ratio decreased from 14.85% to 9.78%. 

The Capital Adequacy Ratio (CAR) stood at 15% in June 2022 as compared to 13.45% in June 2021. Regarding the total loan, the credit exposure increased from Nu 172 bn in June 2021 to Nu 185bn in June, this year.

Figures show that the top three highly exposed sectors are Housing with Nu 48.66bn, constituting 26% of the loans sanctioned by the financial institutions, Service and Tourism with Nu 47.89bn at 26% and Production and Manufacturing with Nu 24.8bn at 13%.

Further, the cash flow in the financial institutions is expected to remain relatively stable with the implementation of the Domestic Liquidity Management Framework to help the financial institutions with liquidity support.

So far, the domestic financial system has already played a significant role in supporting the liquidity needs of businesses during the pandemic. The deposit’s structure has remained stable and largely unaffected since June 2021.

Kinley Yonten from Thimphu