…. the lowest record since the rupee shortage in 2012

Thukten Zangpo

Despite liquidity surplus in banks, Bhutan’s credit sector slumped due to unabated weakening of economic activities, risk aversion behaviour of financial institutions (FIs), and delay in government spending in capital projects.

The total loan disbursement from banks and non-banks to customers amounted to Nu 172.12 billion (B) as of June 2021, according to the Royal Monetary Authority’s (RMA) recent annual report.

The total credit growth of the FIs at 5.7 percent is the lowest recorded since the rupee shortage in 2012. The credit growth was 12 percent as of June 2020.

The annual report stated that subdued economic activity due to the Covid-19 pandemic has resulted in the fall of domestic private demand. “Banks’ credit to private sector that accounted for 70.2 percent of all credits grew lower from 13.3 percent to 6.5 percent in fiscal year (FY) 2020-21.”

It also stated that breaking in the economic sectors, loans disbursed to housing and construction sector, which accounted for 26.1 percent to Nu 44.9B, reduced significantly to 6.8 percent in FY 2020-21 from 21.9 percent.

The sector was adversely impacted by the pandemic because the construction sector growth is largely dependent on foreign labor.

The service and tourism sector’s credit at Nu 48.41B, which was also severely impacted by the pandemic recorded a lower growth of 4.7 percent in FY 2020-21 from 25.7 percent.

Despite a rise in agriculture’s share to gross domestic product (GDP) and policy initiatives on the supply front, credit to agriculture, which accounted for 4.3 percent of the total credit, contracted by 0.4 percent compared to 6.1 percent in the previous year.

“As in the past, the concentration of credit in primary production such as agro-processing and livestock combined with low-level innovations and technology were the main underlying factors that contributed to slower growth in the agriculture sector,” the RMA stated.

Similarly, the share of agriculture loan to GDP stood at 3.7 percent, reflecting a low level of investment in agriculture as compared to other sectors.

On the other hand, credit to trade and commerce expanded by 10.0 percent in FY 2020-21 to Nu 19.68B, mainly due to the facilitation of soft loans by the FIs to ensure an uninterrupted flow of essential goods during the pandemic.

Similarly, credit to transport sector also saw significant growth from -6.9 percent to 7.0 percent in 2020-21, largely driven by increased demand for passenger cars.

Of the total credits, the commercial banks financed 76 percent (Nu 130.90B), and the remaining were financed by non-banks.

On the deposit side, the RMA stated that deposits with FIs rose by 16.21 percent in FY 2020-21 to Nu 175.55B because of the drying up of spending and investment activities in the economy.

While the credit to deposit ratio, which measures demand for credit relative to available funding, decreased from 89.3 percent from the pre-pandemic period to 75.1 percent as of June 2021.

However, the RMA estimated that the bank’s credit to the private sector to increase by 8 percent in FY 2021-22 from Nu 142.82B in FY 2020-21 with the ongoing economic recovery effort and increase in demand for credit.

Meanwhile, the non-performing loans (NPL) also saw a decline to 14.1 percent in June 2021 (Nu 24.24B) as compared to 16.4 percent (Nu 26.66B) in June 2020.

The highest NPL was recorded in the service and tourism sector with 29.2 percent (Nu 7.07B), followed by the trade and commerce sector with 19.4 percent (Nu 4.84B), and the manufacturing sector with 19.0 percent in FY 2020-21.