MB Subba

The ratio of non-performing loans (NPL) decreased in the past year despite the Covid-19 pandemic, which has caused widespread disruptions in the economy.

The NPL ratio to the total credit in the economy reduced to 14.6 percent in March from 19.5 percent in the same month last year, according to the central bank’s monthly statistical bulletin for August 2021.

The total credit as of March stood at Nu 152 billion (B), which means that the total NPL was more than Nu 22B. The total credit disbursed by financial institutions increased to Nu 154B in May although the ratio of NPL for the month is not revealed.

The NPL decreased mainly on account of the deferment of equated monthly instalment (EMI) from April 2020 as part of the Druk Gyalpo’s Relief Kidu, according to bank officials.

Bank of Bhutan Ltd Chief Executive Officer Dorji Kadin said that the status of NPL is not likely to change significantly for a year as the loan deferment scheme has been extended to June 2022.

He said that there hasn’t been much issue regarding NPL after the deferment of EMI. “There will be some improvement in NPL because some of the borrowers will continue to deposit EMIs while others can opt not to pay for one more year,” he said.

Finance Minister Namgay Tshering, who is the chairman of the high-level committee formed to resolve the NPL issue, said that the NPLs were being segregated into categories. The NPLs invested in viable businesses, which are undergoing a temporary loss of income, will be revived jointly by the bank and the borrower.

When it comes to loan investments that cannot be revived, he said the banks would go for foreclosure within three years. He added said that the borrowers and the financial institutions would also try to close the NPL accounts mutually without going to court.

Lyonpo said that there were also NPLs in the names of borrowers that have either died, absconded or are serving life imprisonment, in which case the banks would chalk out a way forward to resolve the issue.

“The government in collaboration with the central bank is taking such a measure for the first time in Bhutan. We don’t want to keep the NPL piling up as it affects financial institutions’ lending capacity,” he said, adding that the government wanted the defaulters to get loans once the NPL issues are resolved.

According to bank officials, the sector-wise ratio of NPL to credit was the highest in the transport sector as it was one of the hardest-hit sectors. The highest NPL, however, is in the service sector in terms of the amount, they added.

The credit growth rate also slowed down to 5.3 percent in May from 13.9 percent in the same months of last year despite the introduction of various soft loan schemes to offset the impact of the pandemic.

Sector-wise, the total credit in the building and construction sector in May stood at Nu 42B, which was the highest. While the credit in the service and tourism sector amounted to Nu 41.255B, the total loan in the trade and commerce sector was Nu 19.195B.

Loans to the agriculture sector stood at Nu 6.563B, which was only 4.6 percent of the total credit disbursed by financial institutions. The credit in the transport sector stood at Nu 6.687B as of May this year.

Credit in the manufacturing sector stood at Nu 19.875B while loans to commerce and trade amounted to Nu 19.875B.

The Asian Development Bank (ADB) 2021 suggests that the country’s loan schemes should be restructured to address the issue of NPL and contain their impact on the broader financial system.

In one of the recommendations, the ADB states that the current tenure limit for a housing loan, which is 20 years, should be extended to about 35 years, as in many other countries. The prevalence of NPLs significantly and negatively correlates with economic growth.

The ratio of NPLs to all loans averaged 12.0 percent over the past 15 years, according to ADB. Banks’ profitability indicators are sensitive to NPL, which means that NPL should decrease when a bank’s efficiency rises.

Some officials familiar with the NPL issue said that the high prevalence of NPL was partly because of a lack of due diligence, such as a lack of proper verification of collaterals, on part of the financial institutions.

Edited by Tshering Palden