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With more than 23 percent of domestic credit injected into building and construction, the economy continues pumping air into the bubble.

The housing bubble was one of the main causes of concern when the economy was hit by a severe Indian rupee shortage, followed by credit restrictions.

As of November last year, building and construction made up Nu 20.20 billion (B) of the total domestic credit of Nu 87.430B. This figure is excluding the loans the National Pension and Provident Fund provided. In 2015, of the total credit of Nu 74.77B, around Nu 18.28B (24.4 percent) was in this sector.

Economists say that a combination of low interest rates and loose credit can bring borrowers into the market. This means that the current policy has the tendency to drive the demand for loans.

Add to it the increasing number of vehicles, translating to imports and foreign currency outflow, local economists say that the country’s economy is heading in the same direction it did in 2013.

The only saviour, should the same problem recur, is the hydropower revenue from the on-going hydropower projects. This indicates that the delay in construction of these projects has an implication on the government budget,  trade and current account balance and also the foreign currency reserve.

While the cumulative figures on transport loan as of November last year stood at Nu 4.21B, trade statistics show that the country spent almost Nu 7B on import of vehicles and spare parts.

A banker said that a major portion of personal loans is going into purchasing vehicles. As of November, Nu 13.6B has been booked against personal loans.

At the same time, loan for agriculture, the sector which employs a huge chunk of the work force, is just Nu 4.65B.

After building and construction, service and tourism has highest share of domestic credit at Nu 16.63B. Trade and commerce, which constitutes 13.5 percent of the total credit, is again leading imports.

On the sector that enhances exports for instance, the manufacturing sector has Nu 11.84B worth of credit.

“The financial sectors’ dependence on the government and corporate deposits and few sectors for loan poses a great risk to the economy,” a local economist said.

The World Bank, in its study of financial institutions, has recommended the country to upgrade its banking to Basel accord on banking supervision.

The Basel Committee is the global standard-setter for the prudential regulation of banks across the world through supervisory guidelines that central banks impose on banks in their respective countries.

Currently, Bhutanese banks are categorised in the Basel-I accord and the suggestion is to move to Basel II and then to Basel III. Basel I is a set of international banking regulations focused mainly on credit risk by creating a bank asset classification system.

Unlike Basel I, Basel II enables the banks to create standards and regulations about how much capital the financial institutions must have set aside. Banks need to put aside capital to reduce the risks associated with its investing and lending practices.

Basel III builds on the other two Basels, which enables the banks to improve their ability to deal with financial and economic stress, improve risk management and strengthen the banks’ transparency.

A banker said that these Basel accords would enhance the banks’ ability to take risks, and thus lower the interest rates because banks are in a better position to take risks as it moves up the Basel chain.

Tshering Dorji

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