NPLs that have become performing requires six months observation period 

Thukten Zangpo

Hundreds of contractors who were awarded the contract works before and during the pandemic are on the verge of terminating their works.

Construction Association of Bhutan’s (CAB) president, Trashi Wangyel, said that the contractors are already in a difficult situation because of the pandemic. “The pandemic pushed the costs of the construction raw materials and labour costs up by 60 percent.”

The recent directive from the Royal Monetary Authority on the six-month observation period will further aggravate the situation, Trashi Wangyel said, adding that most of the contractors who were awarded the work before and during the pandemic were under non-performing loans (NPLs).

NPLs are loans with payments that are overdue by 90 days or more. 

About 90 percent of the contractors depend on the capital budget of the government for the construction works. Contractors avail remaining works from the state-owned enterprises.


RMA’s directive

The RMA issued a directive on October 10 to all the financial institutions (FIs) on the treatment of NPLs for term loans that have become performing through repayments made by the borrower.

The directive stated that NPLs that have become performing through repayments made by the borrower shall be placed under the ‘observation period’ for a period of six months with no bank guarantee, letter of credit, and other OBS items.

For example, NPLs upon repayment of all overdue amounts shall be classified as regular accounts but shall remain under observation for six months.    

Six-month observation period is applicable even for the closed NPL accounts.

The directive also stated that the FIs must have in place processes for monitoring and reporting of the loans classified under the six-month observation period.

To ensure compliance, the directive also asked the internal audit function of the FIs to conduct independent review or audit monthly.



The contractors repaid the money they got with the start of the work after the pandemic to make their bank accounts’ performing, Trashi Wangyel said.  “With no financial backing or access to finance or without bank guarantee facilities, contractors cannot bid for new works and it will affect the ongoing works, if bank guarantees are not renewed,” he said.

For ongoing works that received time extension under the fiscal measures also needs to renew the bank guarantees.  Non-renewal of bank guarantees will be converted to the overdraft account. The account will remain as a new loan account with the contractors and could go under NPLs if the contractor is not able to pay back.

A bank guarantee, which is 10 percent of the total contract value, has to be submitted as a performance bond to the procuring agencies. It is a guarantee that the contractor will execute the contract. Otherwise, the procuring agencies can take the 10 percent.

Since it is an instrument issued by the banks upon collateral, the banks will also have to give the equal amount of money to the procuring agencies because of banks’ unconditional bank guarantee.

Trashi Wangyel said that if the existing bank guarantees are not renewed, it is likely that the bank guarantees would be encashed by the procuring agencies which will create further rift or trust issues with FIs and further dangers or inabilities of repayment issues will arise, thereby creating more NPLs.

He said that the contractors requested the government to consider the unreasonable cost escalation. However, the government buffeted their request.

“Most of the contractors want to terminate contract works because if the contractors continue executing the works, the losses would be worse than the penalty they will have to pay to the government,” Trashi Wangyel said, “Contractors prefer a 20 percent penalty.”

As per the contract agreement between the contractors and the clients, the clients have to adjust the cost escalation, and if not possible, the contractor or client can terminate the contract.

In case of termination, a contractor can pay a penalty of 10 percent of the total contract value or 20 percent of the remaining work value.

A contractor, Ugyen, said that the non-performing contractors cannot participate in the contract work for six months and with no work, the loan portfolio would not improve. He added that his company is at risk of defaulting on loans soon.

The CAB held the annual general meeting from October 4 to 7 and the members unanimously endorsed to request the RMA for exemption or reduction of the observation period.