An unwelcome credit growth

Economy: While the country’s credit market is concentrated in housing and personal consumption, a few sectors are starving for credit.

As per the Asian Development Bank’s (ADB) assessment of financial sector development, agriculture accounts for about 16 percent of GDP but gets only about three percent of the credit pie.

Similarly, transportation accounts for about nine percent of GDP but gets only about four percent of credit from the financial sector. A banker said that this could be because people avail cheaper loans like personal loans to buy vehicles.

However, the concentration of credit in housing as a consequence of overbuilding in the suburbs of Thimphu and Paro appears to be a housing crisis in the waiting, the ADB states in its report.

ADB’s discussion with bankers indicate that the majority of newly constructed apartments are for rentals, and that rent will not cover the carrying costs associated with financing of real estate in these suburbs.   

About 25 percent or one fourth of the total credit is concentrated in housing. Then comes personal loans occupying 19 percent of credit in the domestic market.

The manufacturing sector, which is 16 percent of the credit pie, the ADB states, is highly dependent on the hydropower industry, because should the cost overrun of the projects shoot above the roof, this sector is likely to suffer.

In all, credit as a percentage of GDP rose from 11 percent in 2002 to 49 percent in 2011, which means in 2011 half the GDP is constructed from credit.

Credit growth has averaged more than 20 percent per year over the past decade, rising from Nu 10 billion in 2005 to Nu 63 billion in 2014.

Personal credit averaged 55 percent from 2008–2011.

Concentration of credit to a certain borrower, or group of borrowers, also exposes financial institutions to risks, as any unfavorable developments in the business or the sector to which the borrower belongs to can severely affect the position of financial institutions.

A local economist said credit growth directly hurts the current account deficit, as much of the credit availed are spent in purchasing and importing goods and services.

The ADB report also states that steel and concrete for the construction of hydro plants were imported primarily from India, and much of the labour force working in the Bhutanese construction sector is from India and remit their paychecks back home.

Motor vehicles and materials for housing construction were entirely imported from abroad.

Consequently the country ran out of Indian Rupees and in December 2011, the RMA was forced to sell USD 200 million of its international reserves, to meet payment obligations to India.

In response to a shortage of foreign exchange, the RMA imposed a ban on housing and vehicle loans in March 2012 that lasted through August 2014.

This ban cut the growth in personal loans, construction loans, and total loans by half.

The local economist said a major chunk of the credit from the economy is dedicated to select sectors. This, he said, could pose a threat to the country’s economy should the sectors like construction, hydropower and manufacturing don’t do well. These sectors, he said, are again highly dependent on each other posing greater risk.

For instance the cost overrun of the hydropower projects translate into an increase in power tariff, which in turn would force the manufacturing sector that survives on cheap power to close shop. Real estate, he said has already experienced the down side with construction boom in urban areas. These factors, he said, would hurt the banks and when banks collapse it leads to an economic crisis.

Tshering Dorji

2 replies
  1. irfan
    irfan says:

    A ‘Consumption Based Economy’ or simply a ‘Consumer Economy’ is bound to have such growth in its Credit portfolio. But interestingly enough, even hydro power being the prime economic driver is also only consuming a ‘Credit Growth’ now. Things will definitely change once the under construction projects gets commissioned and debt to net asset ratio for these projects starts to fall. We also hear the experts talk the same thing again and again.

    If we consider a complete supply chain for finances, the end consumers are not the only responsible agents for credit growth or just credit consumption in simple words. Even the source of the supply is consuming the credit it offers. Or, is it that I have made a mistake there?

    It’s mentioned that real estate development is the biggest contributor to the growth in credits in recent time. But if we consider a single ‘bank to real estate developer’ relation, the asset created by the developer is not the same as asset created by the bank during a given financial period. And we never want a situation when the debts can’t be repaid as per original plans and the banks needing to transfer a developer’s asset to their own accounts. That may only lead to a difficult situation for the economy. At least, I assume it that way with my understanding.

    As it’s mentioned that credit as percentage of total GDP has reached 49% in the year 2011, we may also be interested to know credit growth per year as percentage of asset created in total. Or, is there a point in calculating net GDP growth as percentage of total credit consumed by the economy in the previous financial year!

    Recycling is what we talk in an economy, re-consumption is what we may end up with. If that very economy is all about finance, only valuations will change for the currencies and hence, a different value for the same GDP calculated before. So if credit growth as a percentage of GDP doesn’t see an increase, what happens to the asset valuations? Is there any liabilities to credit ratio to read by any chance!

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