With three banks putting halt on housing loan, building and construction sector is yet again posing risk to the volatile economy.
Bank of Bhutan (BoB), T-bank and Bhutan Development Bank (BDBL) had put a brake on lending to the construction (housing) sector. BoB has even stopped issuing additional loan for those who are in the midst of building.
This has created a huge concern among private firms and individual owners, who are in the process of building houses. Almost all house owners avail additional loans for their final payment.
Sangay, 52 said, he was worried since the construction already began, and he would definitely need additional loan to complete the construction. “The work is halfway through. If I don’t get an additional loan, how will I pay back to the banks?”
Like Sangay, many house owners who are yet to complete their works are worried and frustrated with move few banks have taken.
While many clients shared their grievances over the suspension of additional loan, few are eagerly waiting for the approval to begin construction.
BoB has the highest client availing housing loan, 2,363. For 20 years premium, the bank charges an interest rate of 8.93 percent for commercial housing and 7.98 percent for residential, which is the lowest in the market. Other banks charge between 10.45 percent and 12.5 percent.
A house owner said, when the loans are delayed, there is an increase in additional construction cost. “It is a loss-loss situation both for the bank and client,” he said.
Some have started to sell their assets like land to complete the construction. However, there are few who are left with no option but to halt construction.
President of Construction Association of Bhutan (CAB), Thinlay Gyamtsho, said the construction industry has been affected the most. “Without business, both contractors and private owners will default on loans and the interest imposed by the banks will keep piling,” he said.
He said the banks should have a proper mechanism and that regulating bodies should make firm policies to address such issues. “It is not wise to discontinue the loan just because the bank came to know that it has excessive lending.”
According to an official from BoB, most of their clients are moving to Bhutan National Bank and other banks, which are still giving housing loan.
Some sources claimed that the move to freeze housing loan was in accord with the advice from the central bank. However, the Governor of Royal Monetary Authority (RMA), Dasho Penjore clarified that RMA has neither stopped nor issued any directives to stop lending. He said that it is the individual bank’s risk aptitude to either lend or not in any sector.
Other banks are of the stand that they continued with the loan since no directives were received regarding housing loan.
However, a banker said that banks are responsible to exercise its own prudence as per the guidelines issued by the RMA. Some banks have even stopped low interest-bearing loans to its employees since the exposure was high.
Figures from the RMA point out that loan is highly concentrated in the housing sector. The sector-wise analysis reveals that out of the total loan of Nu125 billion as of March this year, the housing sector has the highest loans with Nu 30.3 billion followed by service and tourism sector, Nu 30.19 billion. BoB alone has an outstanding housing loan of Nu 12.4 billion as of June 2019.
This means that hotels, building, and construction dominate the domestic credit. What deteriorates the situation is that these sectors have recorded the highest non-performing loan (NPL). For instance, service and tourism sector has about Nu 4B worth of bad debts.
Leading towards sectors directly translates into consumption having more than doubled in a span of over four years. This is how the rupee shortage ignited which directly impacts the foreign currency reserve and current account balance.
The country’s domestic credit has swelled by more than Nu 60B in four years since the temporary measures on loan and import restrictions were lifted in 2014.
A similar move was taken in 2012 when the lending spree, particularly in building and construction was at its peak, igniting the rupee crisis. Questions are being raised whether the economy is showing the symptoms of overheating again?