MB Subba

The country’s loan schemes should be restructured to address the issue of non-performing loans (NPLs) and contain their impact on the broader financial system, the Asian Development Bank (ADB) has recommended.

The Asian Development Outlook 2021 that was shared with the media on April 29 recommended that the current tenure limit for a housing loan, which is 20 years, should be extended to about 35 years, as in many other countries.

ADB’s economics officer in Thimphu, Tshering Lhamo, said that the Royal Monetary Authority could consider supporting recovery strategies on balance sheets by granting more autonomy to financial institutions in how they restructure loans.

The Credit Information Bureau of Bhutan (CIB), ADB says, has a more dynamic role to play in helping financial institutions avoid excessively risky loans and advances. CIB collects credit data of the financial institution’s clients, consolidate it and shares the information to financial institutions to make a sound credit decision.

However, the ADB report stated that CIB currently sits on a static database that does not provide to lenders up-to-date assessments of prospective borrowers, pointing to a need to enhance bureau capacity with better technology and technical competence.

According to the economics officer, aggressive approach worth exploring towards addressing the NPL issue would be to establish a public owned asset rehabilitation ( reconstruction) company, a specialised financial institution that buys the non-performing assets from banks and financial institutions so that the latter can clean up their balance sheets.

The prevalence of NPLs significantly and negatively correlates with economic growth.

Bhutan’s finance industry is still dominated by banks, with five banks providing 75 percent of all loans and the balance from three non-bank financial institutions (FIs).

One of the insurance companies holds 34 percent of all non-banking FIs’ NPLs, according to the report.

The ratio of NPLs to all loans averaged 12.0 percent over the past 15 years. But the Covid-19 pandemic has bumped the NPL ratio to loans ratio to 16.4 percent.

According to ADB, for non-banking FIs, another factor is weak expertise for loan appraisal, credit monitoring, and supervision, which contributed to a high NPL ratio of 30.5 percent for non-bank FIs in June 2019.

According to ADB, banks’ profitability indicators are notably sensitive to NPLs, which means that when bank efficiency rises, NPLs are expected to decrease.

More specifically, a 3.9 percent decrease in NPLs results in a 1.0 percentage point increase in return on assets, while a 1.0 percent increase in total loan volume brings a 2.8 percent increase in NPLs.

The NPL situation must be assessed as well in relation to a rapid increase in domestic credit, which grew by a compounded average of 19 percent from 2010 to 2020.

Most of this growth skewed towards services and tourism, trade and commerce, and housing. Services, including tourism, are the sector that accounts for the most NPLs at Nu 8.5 billion or 30.3 percent of all NPLs.