Economy: While deposits with the financial institutions experienced a growth of 17 percent, credit expanded by 21 percent, last year.

The total credit outstanding with the financial institutions, (banks and non-banking financial institutions, excluding the NPPF) saw a growth of 21.1 percent, to Nu 86.6 billion in 2016 from Nu 71.5 billion in June 2015.

The Royal Monetary Authority’s (RMA) annual report states that the growth in credit transpired as the economy has recovered from the effects of the ban on housing and vehicle loans. “Since the capital market is at the nascent stage most of the economic activities have to largely depend on the financial systems,” the report states.

Of the total credit of Nu 86.6 billion, banks financed 82.5 percent of the total credit amounting to Nu 71.4 billion.

The non-banking financial institutions provided the remaining 17.5 percent.

The report also states that the majority of the banks’ credit remain concentrated in the private sector, constituting 85.8 percent of the total credit as of June 2016.

The housing sector again was the biggest benefactor with 22.2 percent of the total credit as of June 2016.

The magnitude of credit exposure indicates the extent to which the lender is exposed to the risk of loss in the event of the borrower’s default. This means that if the housing sector collapses, banks are at greater risk. The trade and commerce sector has 20.3 percent of the total credit concentrated in it.

However, the overall financial institutions exposure to personal loans has remained the same as the previous year at Nu 11.9 billion which constitutes 13.7 percent of the total credit.

While the credit exposure of the service sector is 13.1 percent, the manufacturing industry constitutes 12 percent of the total credit.

Exposure to the transport sector has also increased to 5.2 percent of the total loans as compared to 3.7 percent in the previous year. This growth, as per the RMA report, is reflective of the lifting of the ban on transport which was imposed during the Indian Rupee shortage.

The share of credit under other sectors (including staff loans, small businesses, the artisans’ scheme, and EDP loans) slightly decreased to 2.4 percent in June 2016 from 2.6 percent at the end of June 2015.

While the credit growth means more income for the banks, it also comes with risks and non-performing loans (NPL) is one of the indicators, which indicate the quality of the loan portfolio of the financial institutions. The NPL affects the profitability as well as capital of the lending institutions.

During the year, the NPL ratio slightly improved from 9.5 percent in 2015 to 9.1 percent in 2016. However, further analysis shows that the NPL for most of the sectors deteriorated in 2016, except for sectors like manufacturing and industry, housing and personal loans.

The NPL of services deteriorated from Nu 746.1 million to Nu 1.4 billion and trade and commerce from Nu 1.4 billion to Nu 2 billion.

The non-performing loans under the agriculture sector also increased from Nu 484.9 million to Nu 710.6 million in 2016.

In banking, credit is considered income-generating assets, deposits are liabilities, as every deposit has costs. But more the deposit, the more credit the banks can mobilise.

The total deposit (including foreign currency deposits) has increased to Nu 73.1 billion from Nu 62.4 billion, recording an annual growth of 17.1 percent as of June 2016.

The share of demand deposits decreased to 53.1 percent as of June 2016 from 57.3 percent (Nu 35.7 billion) in June 2015.

On the flip side, the share of time deposits increased to 44.7 percent from 40.8 percent (Nu.32.6 billion) over the same period.

Tshering Dorji