…trade and commerce sector have highest share

Thukten Zangpo

In a concerning trend, non-performing loans (NPL) in Bhutan’s financial institutions have grown by approximately 54 percent over the past six months, from September of last year to March of this year.

According to data compiled by the Royal Monetary Authority (RMA), NPL reached Nu 18.02 billion, equivalent to a gross NPL ratio of 8.7 percent in March. This marks a significant increase from the Nu 11.67 billion reported in September last year. It is worth noting that the highest NPL of Nu 24.4 billion was recorded in 2020.

Alongside the rise in NPL, the total credit extended by financial institutions increased by about 8 percent to reach Nu 207.29 billion during the same six-month period, up from Nu 191.96 billion.

Hem Kumar Acharya, the director of banking operations at Bhutan National Bank, painted a bleak outlook for the business scenario, stating, “Many people cannot afford to pay an equated monthly installment.” He further highlighted that a significant portion of the NPL stems from the trade and commerce sector, particularly among shopkeepers with overdraft loan accounts.

These overdraft loan facilities or working capital loans in the trade and commerce sector fall under the category of NPL if they are not renewed annually. However, there is a provision by the RMA that provides a grace period of 90 days for renewal.

Overdraft loans or working capital are short-term loans obtained by businesses, including wholesalers, retailers, manufacturers, and contractors, to support their day-to-day operations against the value of their stock and adequate collateral security. These loans typically have a one-year duration.

An official from the Bank of Bhutan said that the majority of NPL arises from overdraft and transport loans. The decline in business activity due to fewer customers visiting shops has been cited as a common reason for repayment difficulties.

Transport loans, another significant contributor to NPL, have been affected by disruptions in the boulder export industry. Boulder exporters who purchased trucks for their businesses are facing challenges in meeting their equated monthly installments promptly.

Fortunately, sectors such as housing, tourism, and construction have not contributed significantly to the NPL due to loan deferments under the Monetary Measures IV. However, with the deferral period ending in June 2024 and if there are no further extensions, there is a concern that more loan defaults may occur.

To address the risks associated with NPL, financial institutions and the RMA are engaged in discussions aimed at mitigation strategies.

Under the Monetary Measures IV announced in June last year, high-risk sectors, including hotels, restaurants, tourism, and airlines, were granted a two-year loan deferment, which extends until 2024. The RMA recently extended the deferment until June 2024 for moderate and low-risk sectors, which were previously deferred until June 2023.

The sectors covered by this extension include construction (contract-based), hospitality, entertainment, recreational services, mining and quarrying, manufacturing enterprises, handicrafts and textile production, retail trade, commercial housing, home loans, personal loans (consumer and mortgage), transportation (commercial and non-commercial), and education loans. Agriculture-related services, trade, education, and health services are classified as low-risk.

Concerns about loan deferment beyond 2024 were raised during a recent public-private dialogue on May 26 at the Bhutan Chamber of Commerce and Industry. Private sector members also suggested extending the repayment of accumulated interest during the deferment period from five years to at least ten years or aligning it with the loan tenure.