A meeting between Bhutan's Royal Monetary Authority (RMA) and financial institutions has concluded that the sanction of additional working capital loan to the country's steel industries is not a good idea.
They also agreed that the banks could service the interest of steel industries’ loan to an extent and defer the principal repayment for 6 months. The decisions, however, are not final.
“The banks, by approving additional working capital, cannot guarantee the market, but instead could worsen the situation and drag financial institutions into the problem too,” said RMA’s managing director, Daw Tenzi, during the meeting.
Daw Tenzi added that if banks gave steel extra working capital, tourism and others, affected by the current global recession, might ask too. “We protect the safety of financial institutions and can’t put them at risk by relaxing the prudential regulations.”
Bank of Bhutan managing director, Kinga Tshering, said: “It will escalate the situation further by increasing the level of inventories if market demand for the product is not in place.”
RMA’s prudential regulation refers to the limit on credit to the ten largest borrowers from financial institutions, which is 30 percent of the total loan portfolio. “If banks cross the limit, then there’d be no liquid cash, which is their lifeline,” said RMA official Eden Dema.
Eden Dema added that, if the government guaranteed an additional loan to steel industries, it would not fall under RMA’s prudential regulations.
Following the international financial crisis, steel industries had recently approached banks for interim measures, such as capitalisation of interest, deferment of loan repayment by a year, reduction of interest rate of term loan with working capital limit for a year, and considering sanction of additional working capital loans.
The financial institutions are to prepare a report on the steel industries to submit to the ministry of economic affairs.
Source: Kuensel, Bhutan
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