…from interest waiver and EMI deferment

Tshering Dorji

In shouldering one of the biggest afflictions of the Covid19 pandemic, financial institutions are likely to forego an estimated income on interest to the tune of Nu 1.68B in three months.

This is only half the total interest income for the financial institutions, including the microfinance service providers, the central bank has estimated. An equal portion of the amount comes in as government compensation, meaning that the waiver of the interest for the three months alone comes to around Nu 3.37B.

Announcing the monetary measures in response to Covid19 yesterday, the central bank warned that should the pandemic protract over time, pressure will only heighten across all sectors of the economy while tourism is affected the most.

Monetary measures, however, are aimed at providing short-term relief to sectors facing financial distress in addition to assisting businesses. To complement the monetary measures, the government has also announced fiscal measures deferring the tax payment.

While the RMA said that financial sector is in a position to provide such bold interventions, it will also ensure that the sector remains stable and resilient.

The president of Financial Institutions Association of Bhutan, Karma, said that financial sector has time to rebuild its balance sheet if the economy remains stable. “So, it is in our own interest to do what is right for the economy,” he said.

Deferral and waiver explained

Deferment of loan repayment is a moratorium for repayment of loan installments. Usually when a loan EMI is deposited, a part of the amount is payment against interest accrued and the other is deducted from the principal outstanding. In the subsequent month, a new principal is derived after deducting the repayment made in the previous month. This process follows through until the principal become zero.

Deferral could apply to all loans including employee loan availed by government and corporate employees. However, Governor Dasho Penjore said that employees could choose to continue paying EMIs. In doing so, the entire EMI will go in principal deduction as interest is waived. “There is a big benefit to salaried employees whose incomes are not affected,” Dasho Penjore said.

However, this will directly eat into bank’s profit and shareholders will have to face the impact.

If loans are deferred and no EMIs are deposited, the principal amount remains the same. This means that the principal outstanding in April will be reflected as principal outstanding for the month of June. While there is interest waiver, the central bank clarified that no penal interest will be charged. However, a late fee shall be charged during the deferment period.

The deferment of loans for three months is on all loans except loans to government, inter-bank borrowings and staff incentive loans provided by banks to its employees.

The deferment applies to both performing and non-performing loans. However, interest waiver applies only to performing loans as on February 29. For term loans, overdraft and working capital loans, interest waiver are based on loan outstanding as of April 10. This is the cost that government and financial service providers would share.

FIs will bear additional cost. For instance, the financial sector will be providing additional gestation period of three months in addition to the maximum gestation period specified in the prudential regulations of the RMA. There is also an interest waiver for loans under gestation.

Based on the credibility, business relations and after carrying out proper assessment, financial institutions are also encouraged to provide term-based soft working capital loan for tourism related business. Banks will also use these yardsticks to derive the loan amount.

The tenure in this case is fixed at four years including the gestation period of three months at five percent interest rate. To enable more lending, inter-institutions borrowing are also allowed to facilitate this loan product. This means that banks or other financial service providers can borrow from other financial institutions at four percent to facilitate this loan.

A collateral is required for this term based soft working capital loan but since the loan to value ratio is 100 percent clients can avail loan amounting to 100 percent of the collateral value.

Officials from the RMA said that this loan is to support the tourism-related businesses severely affected by the pandemic. This is why clients have to submit proposals based largely on payroll, rent and utilities with signed commitment that loans will be used to meet operational cost including financing of payroll. To avail this loan, client should maintain a performing loan account as of February 29.

Another kind of loan is aimed at the cottage and small industries (CSI), which will be handled by the National CSI Development Bank. This microloan of up to Nu 500,000 at an interest of 2 percent per annum is aimed at promoting RNR and rural activities.

Working capital loan is also provided to CSI at four percent interest.