Banks and private sector yet to come to consensus over monetary measures

RMA revises terms and conditions for NPL

Four former regulations associated with NPL have been revised

Taking into consideration issues faced by the private sector in connection to the cooling period of non-performing loans (NPL), the Royal Monetary Authority (RMA) has revised terms and conditions that were previously imposed, which include lifting of the observation period for those who have paid their loans amongst others.

On February 28th, 2023, the RMA Governor, Dasho Penjore issued a notification to all chief executive officers (CEOs) of financial institutions (FIs) in the country. The notification, titled “Directive on Treatment of Non-Performing Loan for Term Loan, Overdraft/Working Capital Facilities, and Off-Balance Sheet Items,” outline revised terms and conditions for NPL borrowers who are placed under the six months observation period.

Under the former rules, loan accounts that have once been categorized under NPL, even after repayments, had to undergo a six-month cooling period. People under this category could avail bank guarantee and letter of credit. The first revised terms and conditions state the lifting of the observation period.

According to the 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.

Additionally the second revised term is regarding the reduction of the observation period. The observation period for those NPL under “substandard” category that have become performing through repayments made by the borrowers shall be reduced from six months to three months from the date of repayment.

Meanwhile, there are four categories of NPLs, namely watch exposure (31 to 90 days), sub-standard exposure (91 to 180 days), doubtful exposure (181 to 365 days), and loss exposure (366 days and above).

The letter addressed to CEOs of FIs also states that if an NPL account is closed through court proceedings/foreclosure or transfer of the remaining loan outstanding to another borrower, the borrower/loan transfer shall be subject to six-month observation period, respectively.

Furthermore, NPLs under the Doubtful and Loss category that have become performing through repayments made by the borrowers shall still be subject to a six-month observation period.

The fourth directive on the treatment of NPL for term loans is about the bank guarantee, letter of credit, and “other OBS (overburden) items. This shall now be granted to the NPL borrowers that are placed under the observation period. However, the notification also states that existing bank guarantee or letters of credit that have already been issued may be renewed for the completion of the ongoing projects.

Additionally, under the fourth section of the directive on the treatment of NPL, renewal of overdraft/working capital may be granted by the FIs. But the credit facilities should be renewed within 90 days (including the past overdue days before the expiry of the loan) from the date of expiry of the facilities. Additionally, during the observation period, no borrowers shall be allowed to withdraw the un-drawn amount of the overdraft/working capital from sanctioned amount.

The notification also mentions that the classification of NPLs placed under the observation period shall be as per its respective loan classification bucket. Financial institutions must have in place processes for monitoring and reporting of loans classified under the six-month observation period.

Additionally, independent reviews/audit shall be conducted monthly by the control functions of the financial institutions to ensure compliance with said directive. Quarterly data shall be submitted to the RMA as per the prescribed format.

Meanwhile, Tandy Wangchuk, President of Bhutan Chamber of   Commerce and Industry (BCCI) expressed that he is glad about the revisions made by RMA. “We have been pursuing this for the last 8 months and we made series of requests to the RMA. We are happy to see the revised terms and conditions of the NPL,” he said.

The revised terms and conditions were approved during the 197th RMA board of directors meeting held on February 8th, 2023. “With the new directive in place, the private sector hopes to overcome the challenges faced due to cooling period of the NPL,” BCCI’s President said.

Tshering Pelden from Thimphu