Non-Performing Loan (NPL): Causes and Implications in Bhutan

Pema Dorji

Abstract

The objective of the paper was to study the NPL case in Bhutan and its main determinant,
challenges to the Financial Institution in the credit risk management and its policy intervention
through the collection of the secondary data from the central bank supplemented by the primary
survey with the Financial Institution. The study was planned at three levels; i) at the Regulator
Level (Royal Monetary Authority of Bhutan), ii) at the Financial Institution level (both deposit-
taking bank and-non-deposit-taking bank) and iii) at the NPL client level. However, due to the
bank's internal norms and the policies, financial institutions could not disclose the information on
NPL clients and therefore, this study had to be limited to the Regulator and Financial Institution
level. As per the study, the top 5 NPL sectors in Bhutan in the last six years from 2016 to 2021
were Agriculture, Trade and Commerce, Transport, Production and Manufacturing, Service and
Tourism. The top NPL financial institution in 2021 was Bhutan Development Bank Ltd. among
the deposit taking banks with NPL ratio of 14.88 percent (equivalent to Nu. 3,306.7 million) and
Royal Insurance Corporation of Bhutan among the non- deposit taking banks with the NPL ratio
of 29.75 percent (equivalent to Nu. 6,133.7 million). As per the survey, NPL from the Financial
Institution were due to the client factor, bank specific factor, socio-economic factor and
macroeconomic factor. Accordingly, the paper tried to make a few policy recommendations.

Key words: Borrower, Non-Performing loan, Financial Institution, Agriculture, Trade and
Commerce, Production, Manufacturing, Services, Tourism.


B.A Economic & Environmental Studies (B.A Eco/Evs), Sr. HR & Personnel Officer, PS2
Background and Introduction
The lending business is fundamentally converting people’s deposits into loans and banks get into
liquidity risk, interest risk, and credit risk if the banks are not prudent in providing a quality loan.
Credit risk arises due to the lending of the bank to unsuccessful firms and projects due to the weak
internal control and credit appraisal which later on become a cost to the bank and become a
contagion and threat to the banking ecosystem (Board, 2006). Out of many factors that determine
the quality of a loan, a few of the most important things can be the quality of the borrower,
collateral, and business viability. Generally, the quality of the loan is calculated as the ratio of the
total non-performing loan to the total loan which is also called as NPL ratio.
The financial sector in Bhutan is made up of 5 commercial banks, 4 non-commercial banks (3
insurance companies and 1 National Pension and Provident Fund), 5 Microfinance Institutions
(Bhutan Care Credit Limited, BAOWE, Microfinance Bhutan Private Limited, RENEW MFI,
Tarayana MFI) and 1 National CSI Development Bank Limited (Bhutan, 2020). All of them except
the GIC-Bhutan Re. Ltd. are involved in providing loans to people in different sectors. The lending
of the Financial Service Providers are supported by the Credit Information Bureau ( checking the
credit history of the client), Land Mortgaged System of the National Land Commission (online
verification of land mortgage and the lagthram1 by the Financial Institution) and Central Registry
for Secured Transactions (moveable properties) of the RMA (Royal Monetary Authority of
Bhutan, 2022).
Financial Institutions in Bhutan are the main source of the credit to the borrower including the
household and business firms ranging from the cottage, and micro to large-scale industry. That
way, financial institutions underpin the economic growth of the country by diverting the savings
and deposits of the customer for investment and boosting economic productivity, especially for
emerging economies where access to credit becomes a challenge (Richard, 2011).
Similarly, domestic credit and lending from the bank are expected to play a pivotal role in
supporting the national economic growth through boosting private sector development and
strengthening the sustainability and economic prosperity but the issue of non-performing loans is
becoming a grave concern at the global banking industry and gaining research attention from all
over the country (An Analytical Review of Non-Performing Loan: Bangladesh and Global
Perspectives, 1911).
According to the Prudential Regulations 2017, Non-Performing Loan (NPL) is a loan repayment
obligation that remains unpaid and overdue for more than 90 days. Based on the credit risk
evaluation and risk category, NPL is categorized as sub-standard (Principal and interest payment
overdue between 91 to 180 days), doubtful (181 to 365 days), and Loss (repayment overdue by
more than 365 days). Further, NPL from the prudential perspective and credit exposure is
categorized separately for term loan, overdraft and working capital loan, credit cards, and other
instruments.

1
Lagthram is official landholding certificate issued by the National Land Commission
Different countries have their own standard and criteria to define NPL following quantitative
criteria (number of days of later repayment schedule) and qualitative criteria ( based on the
information on the financial status of the client, prediction and knowledge on the repayment
capacity of the borrower) (Adriaan M. Bloem; Cornelis N.Gorter, 2001). Hou and Dickinson has
defined NPL as a loan that is not generating any income and based on three conditions; i) full
repayment of both principal and interest is no longer expected, ii) failing to pay principal and
interest more than 90 days, and iii) the maturity date has passed and full payment of principal and
interest is not met by the client (Hou & Dickinson, 2007). Others define NPLs as financial pollution
due to the scar it takes on the bank’s balance sheet (Naili & Lahrichi, 2022). The same literature
suggests that, besides the economic condition of the country, NPL is caused by the bank’s internal
condition of weak credit screening process and inadequate governance structure.
NPL put the bank in the serious issue of liquidity crisis, low valuation of the bank, high funding
cost and affecting the profitability of the banks. Therefore, the potentiality of the bank to provide
the loan to the borrower as well as its willingness to the lend will get demoralized due to the NPL
which affect both borrower (lack of access to credit) as well as banks (limited or reduce opportunity
for an investment) (An Analytical Review of Non-Performing Loan: Bangladesh and Global
Perspectives, 1911). NPL may also cause banks running out of the liquidity and not able to meet
its pay obligation to the depositor and therefore failing the banks. NPL, if not careful, indicates the
onset of the banking crisis as it makes the bank system unstable by reducing the credit growth
opportunity and instead puts it at high credit risk, causing sluggish economic growth and reducing
the economy of scale. The Asia financial crisis in 1997 and financial crisis during 2007 and 2008
are examples of how NPL, if not monitored, leads to such consequences and the whole world has
to face such brunt (Anita et al., 2022). In precise, NPL negatively impacts the investment
opportunities of the bank, interest amount generation, worsen the liquidity position of the banks
which in turn affect their position to meet their payment obligation to the short-term depositor.
According to the International Monetary Fund, not mitigation the high credit risk exposure and
NPL lead to the falling in the face value of the loan mortgaged putting the loan into the doubtful
category, cause liquidity crunch by affecting the potentiality of the bank to provide lending and
finally losing interest by the depositor and foreign investor to investment in the bank causing
severe liquidity problem (Adriaan M. Bloem; Cornelis N.Gorter, 2001).
The siphoning of funds by the borrower meaning that loan availed by the customer is not used for
the intended purposes and diverted for some other purposes causes NPL (Richard, 2011). Moreso,
other factor that causes NPL in other countries were due to the national economic slowdown,
insider lending, political affiliation with the bank owner, not disclosing correct information by the
borrower during the submission of loan application and lack of skills and knowledge of the credit
officer is found to be prominent factor that causes NPL. Therefore, this paper aims to study the
NPL in case of Bhutan and its main determinant, challenges to the Financial Institution in the credit
risk management and its policy intervention through the collection of the secondary data from the
central bank supplemented by the primary survey with the Financial Institution.
Credit risk
Credit risk can be caused due to the operation deficiency, inefficient lending policies, weak internal
control and monitoring by the bank, poor loan foreclosure and underwriting of loan negatively
affecting both the borrower and creditors. The emergence of the COVID-19 pandemic in the
country has affected the economic growth and lost employment opportunities and economic
activity dropping Country’s GDP to -10.8 percent in 2020 from 5.79 percent in 2019. The GDP
growth rate for the secondary sector which made of industry sector and Tertiary sector made up of
service sector dropped its growth rate in 2020 to -13.10 percent and -10.74 percent respectively
(National Statistics Bureau, 2021). This sector on the other hand has high credit exposure in the
financial institutions having high risk of NPL (Royal Monetary Authority of Bhutan, 2022).
Loan and NPL Growth in Bhutanese Financial Sector
According to the Royal Monetary Authority of Bhutan, the total loan size for financial institutions
(including 5 deposit taking banks and three non-deposits taking banks) as of March 2020 was Nu.
158.9 billion, out of which Nu. 118.4 billion were for deposit taking banks constituting 74 percent
of the total loan size and Nu. 40.4 billion were for the non-banks making 26 percent of the total
loan. From the above total loan, Nu. 28.1 billion constituted NPL equivalent to 18.1 percent out of
which, 62.5 percent equivalent to Nu. 18 billion were from the 5 deposit taking banks contributed
largely by the BDBL and 37.5 percent were contributed by the non-bank with the highest
contribution from the RICBL. With the emergence of the pandemic, BDBL contribution to the
above NPL was 36 percent amounting to Nu. 7,377 million and RICBL contributed 44 percent
equivalent to Nu. 9291.7 million (Royal Monetary Authority of Bhutan, 2022)
Similarly, as per the Annual Supervision Report 2021 released by RMA, the total loan size of the
Financial Service Provider as of December 2021 was 178,324 million wherein, Nu. 135,416
million were made up by the banks, Nu. 40,793 million were made up by the non-banks and Nu.
2,114 million were made up by the other Financial Service Providers (Microfinance Institution
and National CSI Bank). From the total loan, Nu. 15,806 were NPL constituting 9 percent of the
total loan, out of which Nu. 9,118.67 million (57.69 percent) were made by the banks, Nu. 6,545.33
million (41.41 percent) were made by the non-bank and Nu. 141.63 (0.90 percent) million were
made by other FSP (Bhutan, 2021). The NPL rate has decreased from 18 percent in March 2020
to 9 percent in December 2021 mainly due to several policy strategies and interventions such as
interest payment support as ‘Kidu’ from His Majesty the Druk Gyalpo for all loans outstanding as
on 10th April 2020, Deferment facility for all loans outstanding as of 30th June 2020 supported by
1 percent interest rate reduction for regular loan and other monetary measure.
However, BDBL still contributed the highest NPL among the banks with 15 percent equivalent to
Nu. 3,306.67 million and RICBL contributed highest among the non-bank with 30 percent
equivalent to 6,133.7 million. Based on the NPL tolerance level of 10 percent in the financial
sector, BDBL and RICBL’s NPL is above the tolerance level and therefore, RMA imposes short
term measures and other imposition as part of the corrective action. While conducting review on
NPL, the issues were observed from the loan origination source itself due to the poor appraisal of
the credit proposal and less monitoring, weak internal control procedure and risk management
framework and lack of information management system.
Problem statement and Justification
The study of the NPL in Bhutan has been done mostly using the secondary data from the Royal
Monetary Authority of Bhutan and the Financial Institution. However, no studies were found to
have conducted focusing at three levels viz: i) Regulator level ii) Financial Institution level, and
iii) at the NPL client level. Therefore, such study was expected to cover and capture its vertical
and horizontal issues, views and factors that have contributed to the NPL in Bhutan. This study
was further expected to become one of the diagnoses of the issue at all levels and possibly able to
understand its challenges and constraints, and possibly come up with some policy
recommendations.
Research Objectives

I. To conduct a comparative study of the NPL sector-wise;

II. Study the reason for NPL through primary data collection from FI’s and the client’s
behavior survey toward NPL;
III. What are the strategies and measures to reduce the NPL

Research Question; Scope of the study

In order to achieve the above objectives, the following are some of the key questions that were
considered and need to be answered:

I. What are the determinant factors for NPL and why NPL has increased over the years?
II. What are the challenges to the Financial Institution in solving the NPL?
III. How does it affect the profitability of the banks?
IV. What are the different policy interventions and measures taken to reduce NPL: both by
Regulators and Financial Institutions?
V. What are strategic policy recommendations based on the finding to reduce the NPL?
Literature Review

Lending is the mainstay in the banking sector most predominantly in the emerging economies
(Richard et al., 2008). Adverse selection of the customer and moral hazards lead to the rising of
NPL in the banking sector which means that more knowledge of the loan product and scheme by
the customer than the credit staff and diverting of the fund from the intended purpose cause NPL
(Richard, 2011). Similar literature in other countries shows that most of the bank failure and crisis
is caused by the NPL (Brownbridge, 1998). NPL causes credit risk to the commercial bank taking
a risk averse and discourages them to lend to the borrower reducing the capital flow in the different
sectors in the economy and on the other hand it also liquidity risk making the economy destabilize
in the country. As per the literature it states that commercial banks adopt different strategies and
methods to reduce the loss from the NPL.

In Japan, the lending strategy of the banks is complemented with the policy to conduct credit risk
evaluation (Richard, 2011). In Kenya, banks focus on lending based on the loan repayment
capacity of the borrower rather than collateral-based lending. Reduction of the interest rate were
found to be successful in reducing the NPL along with the proper assessment of the client based
vis a vis credit limit ratio (Loan to Value), cash flow of the borrower, use of forecast and market
feasibility and devising of the proper lending strategy (Waweru & Kalani, 2009). The study done
by Richard on the factors that cause non-performing loans in the commercial bank in Tanzania
were found to be controllable by the commercial bank such as diversification of funds and weak
credit appraisal analysis. However, this study was contradictory to the findings in Kenya who
found unfavorable economic conditions such as national economic downturn causing business
failure as main causes of NPL. Other factors also showed that borrowers were not honest in
providing actual information on their business performance lacking integrity and transparency.
Factors uncontrollable by the commercial bank were found to be lengthy court litigation process
when trying to dispose the mortgaged asset, price of the collateral asset less than the loan
outstanding value, change in the national policies, natural calamities and change in the economic
condition such as inflation, death of the borrower etc.

The rise of the NPL in the country is the symptom for the financial crisis in the financial sector
and the reduced rate of the NPL shows a financial soundness. As per the international standard,
NPL rate of 2 percent and below is found to be a standard (Anita et al., 2022). The consistent rise
of the NPL shows that the country is moving towards a liquidity crisis and onset of financial
instability in the country. Due to its negative impact on social welfare and economic growth, NPL
were considered to be financial pollution (Hermosillo, 2009). Kreeton studied NPL for 50 banks
in the US countries and found that lax credit systems in the banks were responsible for increase in
the NPL (Keeton, 1999). Others found that unsecured loans, low credit standard of the banks and
attitude and the integrity of the borrower cause NPL in the US banking system. The relation
between the NPL and macroeconomic and bank specific factors were also studied by the Espinoza
and Prasad and found that macroeconomic factors such as interest rate and low GDP has strong
association with the NPL and banks specific factors such as credit growth, bank capital size and
efficiency also has strong relation with the NPL (Espinoza & Prasad, 2010). Further, Ghosh
analyzed economic variables and bank specific factor impact on the NPL by taking 50 banks in
Columbia and US and established that increasing GDP, housing price index and growth of
personal income declines NPL while sovereign debt and rate of unemployment increase the NPLs
(Ghosh, 2015).

The study on the banking system of Italy in 1990 Quarter 1 and 2010 Quarter 2 by the Bofondi
and Ropele found that NPL has a direct relationship with the aggregate money supply, lending
rates, unemployment rate and GDP has indirect relation with the NPL (Vacca, 2013). Another
study found that the laisee-fare economy of the country contributes more credit risk than the
collateral based economy (Chaibi & Ftiti, 2015). Anita has done the study to see whether NPL is
sensitive to the macroeconomic determinant in the banking sector of the SAARC countries such
as broad money, exchange rate, government budget balance, GDP, inflation rate and sovereign
debt by keeping the NPL as a dependent variables and macroeconomic factor as an independent
or explanatory variables.

Money Supply

Money supply refers to the liquid position of the banks including both cash and deposit at a certain
period of time. Expansion of monetary policy leads to the increased economic activity and
profitability of the banks which have a positive impact on the investment and the source of income.
Therefore, the repayment capacity of the borrower to the bank increases and exposure of the bank
to the credit risk decreases. Thus, it was established that broad money supply2 has a reciprocal
relationship with the NPL.

Exchange rate

The fluctuation and volatility of the exchange rate bring economic unsteadiness and variation
especially in the developing countries. It measures the domestic currency value in relation to the
foreign currency value. Generally, increases in the exchange rate bring depreciations to the
domestic currency therefore decreasing the price of the domestic goods and services. In such a
scenario, export of the domestic goods increases and import of goods and services decrease as it
becomes a costly business. Therefore, the costly import of the goods and services become pressure
for the commercial bank to issue the letter of credit to the traders thereby the probability of the
bank default risk increases. Thus, it was established that the exchange rate has a positive
relationship with the NPL.

Gross Domestic Product (GDP)

GDP is the main indicator of the economic development of the country. The economic downturn
of the country causes stagflation and recession which proportionately increase the credit risk of
the financial institution as there is less employment opportunity, income and prices. On the other
hand, the economic expansion in the country boosts the income of the household, business and
opportunity for the investment which in turn increases the repayment capacity of the borrower.
Therefore, GDP growth rate is inversely related to the NPL.

Inflation

High inflation impedes the economic growth of the country and reduces the real income of the
borrower leading to the high cost of the borrowing and interest rate. Due to the low economic
growth and the rising cost of living coupled with high wage affect the repayment capacity of the
borrower and the probability of the loan default increases. On the other hand, low levels of inflation
helps in economic growth of the country and creates investment opportunities for the borrower.
Therefore, the relationship between the NPL and the inflation is quite mysterious and hence, NPL
is either positively or negatively linked with the inflation.

Sovereign debt

Sovereign debt also known as government debt, public debt and national debt is mainly caused
due to the trade deficit or budget deficit. Government makes sovereign debt when the country has
spending needs for certain economic activity and to finance the investment and growth in the
country. Government mitigates the sovereign debt by cutting the social spending which adds

2
Broad money is the definition of the money supply which include both notes and coin, other liquid of the
banks including bank deposit and treasury bill which can be easily converted into a cash (Broad Money
Definition - Economics Help, n.d.)
pressure to the household income and the financial obligation of the borrower to pay back their
loan, causing NPL. Therefore, sovereign debt has a direct relation to the NPL.

Other than the macroeconomic factor, bank specific factors such as rapid credit growth, operational
efficiency, compromised integrity, aggressive lending, poor loan follow up, and willful default by
borrowers also lead to the formation of NPL (Singh, 2017). The study observed that excessive
lending by the banks and credit growth cause NPL in the US market (Sinkey & Greenawalt, 1991).
In the similar study, it was also found that higher interest rates cause high cost on the credit to the
borrower and his potential repay the loan get affected. The bank's operational efficiency, timely
monitoring of loans and supervision on the quality of the loan as an early warning system was
found to be successful in reducing the credit risk as it helps the borrower in becoming careful with
their loan repayment after getting constant attention from the banks.

According to the study done by the Adhikari on the NPL in the banking sector in Bangladesh in
2006, NPL are mainly resulted due to the lack of the effective monitoring and supervision by the
banks, poor legal infrastructure and lender’s recourse and lack of the sound strategy to recover the
debt from the borrower (Adhikary, 2006). Another study found that the loans are disbursed directly
to the borrower without properly assessing the character, capital, capacity, collateral and condition
during the application appraisal (Lata, 2014). Due to the high NPL, banks are not able to provide
new loans to the borrower as they face serious liquidity problems. As a result of this liquidity issue
and unavailability of the credit to finance the potential client’s working capital and investment, it
may cause second round of the business failure which may worsen the quality of the bank loan and
lead to the emergence of banking or financial failure (An Analytical Review of Non-Performing
Loan: Bangladesh and Global Perspectives, 1911). The high NPL may trigger banks to raise their
provisioning for loan loss affecting their revenue and cut back on their new loan to the corporate
sector causing bottlenecks to the expansion of their working capital and resuming their normal
operations of the business.

Methodology-Area of study; an overview

The study on the NPL in Bhutan was planned at three levels; i) at the Regulator Level (Royal
Monetary Authority of Bhutan), ii) at the Financial Institution level (both deposit taking bank and
non-deposit taking bank) and iii) at the NPL client level. This quantitative study was based on the
secondary data collected from the central bank and also based on the interview survey using the
structured questionnaire survey. However, regarding the collection of the data from the NPL client
level, the information and the details could not be obtained from the Financial Institution due to
their policy and rules prohibiting the disclosure and sharing of the individual details and
information.

Therefore, the survey interview with the NPL client had to be dropped from the scope of the study
and limited to the study with the regulator and the banks. The secondary data collected from the
Royal Monetary Authority of Bhutan was for the period of six years from 2016 to 2021 and was
analyzed using the advanced excel analytical tools. The survey questionnaire was based on the
structured questionnaire which was collected from the credit head of the financial institution. From
the 9 Financial Institutions targeted for the study, one bank refrained from responding to the survey
questionnaire. Further, the study was complemented using the secondary data from the Annual
Supervision Report and Strategy on credit risk and NPL management released by the Royal
Monetary Authority of Bhutan.

Data Analysis & Finding:

I. Data analysis using the secondary data

Graph 1: Year-on-Year NPL Ratio trend

18.00%
16.00% 14.61%
14.00%
12.00% 10.86%
NPL Ratio

9.70%
10.00% 8.89%
7.76%
8.00% 6.28%
6.00%
4.00%
2.00%
0.00%
2016 2017 2018 2019 2020 2021
Year

The NPL ratio had increased steadily from 6.28 percent in 2016 to 10.86 percent in 2019. Due to
the COVID-19 pandemic and frequent national lockdown, the economic activity of the country
was affected, impacting the income of the people and their livelihood which further affected the
repayment capacity of the borrower. Therefore, the NPL ratio had increased sharply in 2020 to
14.61 percent from 10.86 percent in 2019. However, due to the introduction of different policy
supports and monetary measures such as loan deferment facility, Interest Payment Support (IPS)
kidu, incentive of interest rate reduction by one percent for those clients who pay their loan fully
or regularly during the pandemic, extension of gestation and loan tenure had helped in reducing
the NPL rate in 2021 to 8.89 Percent.

Table 1: Top 5 NPL Sector for Banks and non-Banks

Sector 2016 2017 2018 2019 2020 2021 Total

Agriculture 11.62% 20.60% 18.43% 19.95% 19.22% 12.09% 101.92%
Trade & Commerce 9.52% 10.39% 15.45% 17.17% 24.15% 13.90% 90.57%
Transport 7.56% 8.18% 12.13% 17.47% 25.80% 14.18% 85.32%
Production & 4.13% 5.62% 9.50% 11.88% 22.28% 12.53% 65.95%
Manufacturing
Service and Tourism 6.03% 8.71% 10.91% 12.37% 15.88% 10.19% 64.10%
Personal Loan 7.24% 8.15% 11.12% 10.41% 10.28% 6.81% 54.01%
Housing 5.83% 5.71% 5.16% 6.14% 6.40% 4.57% 33.82%
 Others 1.43% 3.77% 2.21% 2.87% 11.57% 5.69% 27.52%
Education Loan 3.05% 4.71% 4.02% 2.72% 3.56% 3.03% 21.09%
Staff incentive 1.63% 1.45% 2.10% 2.05% 2.05% 0.76% 10.05%
Loan Against Fixed 0.38% 0.13% 0.10% 0.21% 1.28% 0.08% 2.19%
Deposits
As depicted in the above table 1, the top 5 NPL list sectors in the last 6 years are Agriculture, Trade
and Commerce, Transport, Production and Manufacturing, Service and Tourism. This could be
because the loan in those sectors is over concentrated leading to high exposure as all the Financial
Institutions are engaged in lending to the same sectors without conducting its market feasibility
and its investment return. Most predominantly, the NPL in those service sectors were hit hard by
the pandemic leading to the freezing or shutting down of its economic activity causing a credit risk
to the banks.

Table 2: NPL Ratio of the Financial Service Provider

NPL Ratio of the FSP 2016 2017 2018 2019 2020 2021
RICBL 3.37% 6.21% 27.65% 31.10% 43.11% 29.75%
BDBL 12.48% 22.72% 20.73% 23.15% 25.94% 14.88%
REDCL 36.77% 18.68% 13.91% 15.25% - -
BIL 3.48% 3.95% 17.42% 11.37% 22.02% 7.13%
BNBL 6.91% 5.49% 5.62% 8.54% 12.98% 7.99%
TBANK 6.18% 6.15% 5.16% 4.59% 6.39% 4.45%
NCSIDBL - - - - 19.90% 7.40%
BOBL 4.45% 3.16% 2.62% 3.61% 7.09% 3.34%
Druk PNB Bank Ltd 3.25% 2.75% 1.66% 3.98% 5.46% 4.66%
NPPF 4.25% 5.40% 2.55% 1.84% 0.76% 1.09%
RENEW MFPL 2.39% 3.59% 1.84% 2.16% 1.36% 2.20%
MBPL - - - - - 8.79%
BCCL - - - - - 1.78%

A total of 13 Financial Service Provider (5 banks, 2 non-banks, 5 Microfinance Institution and

National CSI Bank) in the country is offering the lending services to different economic sector.
Table 2 shows the variation of the NPL ratio for different Financial Service Provider for the period
of 6 years. The top NPL financial institution in the year 2021 is Bhutan development Bank (among
the deposit taking bank) with NPL ratio of 14.88 percent (equivalent to Nu. 3,306.7 million) and
Royal Insurance Corporation of Bhutan among the non- deposit taking banks with the NPL ratio
of 29.75 percent (equivalent to Nu. 6,133.7 million). As an interim measure to correct the NPL by
these two institutions and to focus on the following up on their legacy loan, providing new loan to
the borrower is suspended at the moment by the RMA including the National CSI Bank.

According to RMA, the sector that contributed to NPL in RICBL is construction sector,
manufacturing, trade and commerce sector mainly due to the operational lapses and weak
monitoring of the loans. However, regarding the BDBL, the maximum NPL was contributed by
the agriculture sector followed by construction, trade and commerce, production and
manufacturing services.
Graph 2a: Relation of Loan size to the NPL

Loan size and NPL

17.53%
16.09% 16.41%
14.61%

10.86%
9.70%
8.89%
7.76% 8.21%

5.52%

2017 2018 2019 2020 2021

Increase percent of loan NPL Ratio

Graph 2b: correlation between Loan size and NPL

20.00%
18.00%
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
Year 2017 2018 2019 2020

Loan increase NPL

The projection in the graph 2a was done to study whether changes in the loan size affect and change
the NPL. Rationally, as per grounded theory, increase in the loan size should increase the
probability of NPL but not necessarily as NPL is caused by the other macroeconomic factor and
external factor which is noticed above in the graph. For three years from 2017 to 2019, loan size
and NPL change concurrently until 2020 where the decrease in the loan size does not change or
reduce the NPL. This could be because the pandemic has affected and worsened the condition for
both the factors. Further, the correlation between the Loan size and NPL were tested and show the
positive correlation between the variables as shown in the above graph 2b.
Table 3: NPL Category-Quarterly analysis for 2021

NPL Category in 2021 (Quarterly). Nu. in million

NPL March June September December Total Percentage
Category

Substandard 7,636.14 7,828.25 5,538.64 3,778.46 24,781.48 28%

Doubtful 2,964.42 2,405.97 2,700.18 1,220.17 9,290.74 11%

Loss 14,437.23 14,436.28 13,733.76 10,807.01 53,414.27 61%

Total 25,037.78 24,670.50 21,972.58 15,805.63 87,486.50 100%

As of December 2021, the Non-Performing Loan under the Substandard category (91-180 days)
amounted to Nu. 24,781.48 million contributing 28 percent to the total NPL, Nu. 9,290.74 million
equivalents to 11 percent were Doubtful (181-365 days) and Nu. 53,414.27 million or 61 percent
of the NPL were under Loss (> 365 days).

Table 4: Loan to Deposit Ratio (LDR)

Year 2016 2017 2018 2019 2020 2020

Loan to Deposit Ratio 83.92% 82.12% 90.85% 89.24% 82.00% 73.02%

Loan to Deposit Ratio is calculated by dividing the total loan amount to the total deposit amount
in the same time period. The LDR is used to examine and measure the liquidity position of the
banks by comparing the aggregate loan to its deposit. The international benchmark of LDR is 80
to 90 percent where the LDR of Bhutan falls along this standard except in the year 2020 where the
Loan to Deposit Ratio is 73.02 percent. In other words, we can say that, in the year 2020, 73.02
percent of the total deposits are loaned out by the Financial Institution. However, there are lots of
variations on the LDR between the deposit taking banks with varying degrees from 58.53 percent
to 132 percent. The highest LDR was in the year 2018 and 2019 before the onset of the pandemic
and lowest can be seen from 2020 onwards as the economic activity was affected by the pandemic
subsequently reducing the loans.

II. Data Analysis based on the Survey with FI’s

This analysis is based on the survey interview done with the 9 Financial Institutions (FI) consisting
of 5 banks, 3 non-banks and a National CSI Bank. However, one bank refrained from taking part
in the study and had to be limited to 8 FIs making the survey respondent turnover to 88.89 percent.
The survey interview was purely based on the structured questionnaire with the focus group (credit
head of the FI’s) and face to face interviews were done with some FI’s and some were done through
the online collection of the data. The questionnaire consisted of two parts: Part I consisted of an
open-ended questionnaire and Part II consisted of closed-ended questionnaire
Causes of NPL: Based on the Financial Sectors Perspective

While asking the causes of the NPL in the financial sector, following factor were found to be main
attributed to the Non-Performing Loan:

Client/Individual Factor Bank Specific Factor

▪ Willful Defaulter: The borrower has repayment capacity but ▪ Poor operational
do not want to pay back the loan efficiency and credit
▪ Fraud processing of loan: Client gets the assistance from the appraisal system.
third party to prepare the business proposal to process the loan ▪ High concentration of
and after approval, divert the loan and fail to pay back. Some loan to the particular
borrowers show the wrong collateral asset during the time of activity. Eg. Loan on
physical verification. futsal, where at one
▪ Focus on the secondary business: Loan availed for the point of time, everyone
particular investment is not executed completely and divert it one aspires to run the
into secondary activity or project causing mismanagement business with the loan
issues. and suddenly lead to
▪ Customer frequently change their contact number and market exposure,
therefore cannot trace them affecting the profit and
▪ Loan deduction letters are not submitted to the Account loan repayment issue.
Section of the concerned Agency for deduction from the salary ▪ Excessive credit
in case of personal loan. growth and improper
▪ Diversion and siphon of loan; -loan embezzlement assessment of the
▪ Customer dishonesty in disclosing the correct information borrower
▪ Legacy NPL borrower: Since, there are no specific policy
rules restricting and limiting the loan defaulter from accessing
credit in the subsequent period especially for the willful
defaulter, the legacy NPL becomes the reason for increasing
the loan default.
Socioeconomic Factor Macroeconomic factor

▪ COVID-19 Pandemic: Pandemic and frequent lockdown has ▪ Due to the high price
put a halt on the economic activity and income pressure. and unprecedented
▪ Seasonality of the Product: Some products are flooded in the inflation in the country
market and push down the price of the product. ▪ National economic
▪ Project failure, death of the client, sickness in the family downturn
member and natural disaster ▪ Due to the loss of the
▪ Loss incurred on the business due to the project failure employment due to the
▪ Closure of the business affect income pandemic – losing
▪ Change in the national policy and putting of new restriction on income to repay the
the business or project after sanctioning the loan loan
▪ Due to the low GDP
Business unsustainable and unviable
growth in the country

Challenges of the Financial Sector

▪ Wrong income and asset: The asset or property purchased with the loan (both movable and
fixed asset) are sold to the third parties before the loan liquidation and cannot trace the property
and client. In some cases, when banks are on the field for the asset physical verification and loan
monitoring, wrong income and assets are produced. For instance, the business license is not
closed after selling to third parties and produces it as a source of income and asset back up to
avail the loan. Some produce different fixed assets, for instance, different land adjacent to his
location to increase the loan valuation and reality of the land is different. The lack of the expertise
in the valuation and device to validate the true asset provide challenges to the FIs. Tracing the
collateral, especially the vehicle sold outside Bhutan and third parties, makes it difficult.
▪ Rural based Client: For some FIs, creating awareness on the repayment of the loan is difficult
since the clientele base is rural. Poor repayment culture of the borrower, low level of credit
literacy and the system of basing the loan towards collateral based than the repayment source of
the borrower makes it difficult to recover the loan.
▪ Natural Factor: Client hit by the natural disaster, death of the client, death/sickness in the family
member makes it difficult as there is no best way to handle this case
▪ Lack of loan foreclosure system: The lack of foreclosure system, delay in the court proceedings
due to the overwhelming number of loan defaults and difficulty in resolving the court case causes
wastage of time and resources for the banks to recover the loan.
▪ No proper credit rating or scoring system: There is no proper credit rating or scoring system
of the client and borrower database to check the credibility and the credit worthiness of the
borrower.
▪ National Policy: Change in the national policies and putting of newer restrictions on the business
and project after the operation of the business with the help of the loan becomes a wrong
investment and makes difficult for banks to recover the loan from the client. The delay and
pending of the payment of the bill from the agencies to the client makes them delay in the loan
repayment. The silos functioning of the agency and lack of collaboration and information sharing
makes it difficult to understand the gap and the system.
▪ Lack of valuation framework: Due to the lack of valuation framework and system, the
standalone valuation of the collateral by the bank becomes imprudent due to the different
valuation rate regime often leading to the less valuation during the loan recovery. For the movable
property, some institutions follow the valuation based on the insurance value and for fixed assets,
valuations are done through standard value. For some, the valuation of the asset is done based on
the location, quality and market value. Some banks have their own defined rate wherein, for land
they follow their own land rate, follow their engineer estimates for assessing the building value
and for vehicle and machinery, the valuation is done based on the invoice price.
▪ Loan recovery mechanism, if the borrower is dead/absconded/imprisoned: The recovery of
the loan in such a case through court order and judicial proceedings is very lengthy. The recovery
of the loan for this case varies between the banks. For instance, in case of the death of the
borrower, the debt is passed on to the family member while some seize the loan collateral and
some bank claim insurance from the insurance companies if it is insured or for some bank, they
ask loan guarantor to pay. In some ultimate cases, banks make rigorous and exhaustive
assessments on the recovery process and submit for write-off. For the absconded, the borrower is
tried to trace through different means using a mass media to trace him, verify with the Department
of Law and order. However, in case of the imprisonment, it is resolved as per the Movable and
Immoveable Property Act 1999 and prudential regulation and other relevant guidelines. Some
FI’s, such loans is submitted to the high level committee for approval and transfer it under the
Asset Pending foreclosure or propose to the board for approval.
Graph 3: Internal control of the FI’s

9
8 8 8 8 8 8
7
6
5
4 8 8 8 8 8
3
2
1 0 0 0 0 0
0
Do you check the Do you check the Do you check Do you have a credit Do you have the NPL
exposure level of a credit history and whether the same strategy to guide the follow-up Division?
loan in the market record of the client asset is mortgaged disbursement of loans
before approving the before disbursing the repeatedly by the and the recovery
loan? loan? client? process?

Yes No Total

The assessment of the internal appraisal system and due diligence at a time of loan origination
especially in checking the loan exposure level, checking credit record and history of the client,
double mortgage of the asset by the client is said to be carried out uniformly by all the responder.
Further, all FI’s have responded to have in place the credit strategy to guide in credit appraisal and
recovery system with the help of the NPL follow-up Division set separately (Graph 3)

Graph 4: Assessment of the borrower

8
7
7
6
5
4
4
3
2 2
2
1 88%
50% 25% 25%
0
Collateral Repayment capacity of Skills and Expertise of Other
the borrower Client
Total responds percent

Financial Institutions were asked on their central most focus during the lending decision and loan
approval system. From the total of eight Financial Institutions, 7 Financial Institutions responded
(making respondent turnover to 88 percent) that collateral of the client is key in making credit
decisions followed by the assessment of repayment capacity of the borrower, skills and expertise
of the client. But most of the lending is collateral-based lending. 4 FI’s responded with assessment
of the repayment capacity and 2 FI’s responded on the skills and expertise but most of their primary
assessment is on the collateral. However, 1 FI’s responded that financial strength and the credit
history of the client to be the central focus while making a credit decision to the borrower. The
important fact to know from this study is that no FIs have only one central focus that will decide
on the approval of the loan but the combination of the factor of one or other.

Graph 5: Internal Policies control

Does your Department/Division/Unit have

enough credit expertise and experience to do 13% 88%
credit appraisal to make a lending decision?
Do you check the qualification background of
the credit officer before placing in the Credit 25% 75%
Department?
Do you have a delegation of power to the
branch office in making credit decisions and 25% 75%
recovery processes?
Do you rebate the interest for those clients who
13% 88%
liquidate loans before the maturity date?

Do you conduct independent credit reviews

25% 75%
periodically in the bank?

0% 20% 40% 60% 80% 100% 120%

No Yes

While asking on the availability of the adequate credit expertise within the banks to perform credit
appraisal and to take lending decisions to the borrower, 88 percent of the respondent responded to
have and 13 percent responded not having the enough credit expertise (Graph 5). Similarly, the
question on human resource selection priorities in terms of checking the qualification background
of the credit officer before placing in the credit Department/Division were asked and 75 percent
responded of checking the qualification, whereas 25 percent responded that they do not check the
qualification background. Similarly, regarding the delegation of the power to the branch office, 75
percent reported having delegation of power to the branch office in making the credit decision and
loan recovery process while 25 percent do not have such delegation. On the interest rebate front,
only 13 percent responded to having interest rebate policy for those clients who pay or liquidate
their loan before the maturity period and 88 percent responded of not having such policy with
them. On the question of the independent credit review, 75 percent responded to conduct and carry
out the independent credit review while 13 percent responded to conduct such review only upon
the compliance requirement.
 Graph 6: Training and workshop to the credit officer

Quite often, 1
Percent, 13%

Total, 8
Sometimes, 7

Percent, 88%

As depicted by the graph 6, the questions on the training and workshop to build the expertise and
skills of the credit staff were asked to the FIs. From the total of 8 FIs, only 1 agency responded to
have the training and workshop providing quite often to their credit officer whereas, 7 agencies
have responded to provide only sometimes and during the need basis.

Table 5: Likert scale rating on NPL

NPL Parameters Strongly Disagree Neither Agree Strongly

Disagree Agree nor Agree
Disagree
NPL results due to the poor risk management and weak 13% 13% 13% 50% 13%
internal control system of the banks
Failure of the business and the lack of entrepreneur skills - - 13% 38% 50%
cause to NPL
Excessive credit growth can cause NPL 13% 38% 13% 13% 25%
Weak assessment and lack of monitoring increase NPL - 13% - 38% 50%
Competency and management skill of the bank in making - 13% 25% 25% 38%
the credit decision can change NPL
Delegation of lending power to the bank branches can 13% 50% 25% 13% -
help in reducing NPL
Fund diversion and poor management of the fund by - - - 13% 88%
borrowers cause NPL
Poor integrity and lack of accountability by borrowers - - - 13% 88%
cause NPL
Change in the national policies and rules contribute to - 25% 25% 25% 25%
NPL
Failure of the business and income loss causes NPL - - - 13% 88%
Practice of multi-collateral by client cause NPL 13% 13% 25% 25% 25%
High exposure to loans and credit cause NPL - 13% - 25% 63%
Weak credit appraisal system causes NPL - - - 63% 38%

Different factors attributed to the NPL were studied from the Financial Institution using the Likert
scale of 1 to 5 (1 being Strongly Disagree and 5 being Strongly Agree). Accordingly, their different
levels of responses to this questionnaire were analyzed and presented in table 5.
Discussion and Critical Analysis

Credit Risk and NPL Management

The current governing rules and regulations issued by the Royal Monetary Authority of Bhutan to
mitigate the credit risk and reduce NPL includes Prudential Regulation 2017, Rules and
Regulations on the foreclosure and write off of Non-Performing Loans 2022, Rules and
Regulations for loan restructuring by Financial Service Provider, Macro prudential rules and
regulation 2018, Risk Management guideline 2019 and Corporate Rules and Regulations 2021.

As per section 7.1 of the PR 2017, “the financial information of the borrowers reflects viability of
the business and the borrowers’ ability to repay loans through primary sources, other than relying
too much on collateral requirements”. As per the Section 3 of the same regulation set out the
regulations on credit concentration by setting out the requirement of forming a credit committee
and internal policies, procedure and manual for credit activities. Further, each financial institution
should set up an independent credit review unit as a specialized internal body for monitoring,
evaluating and assessing the credit exposures.

The guidelines on the foreclosure and write off of NPLs lay out the broad and uniform principles
to the Financial Service Provider for foreclosure and writing off NPL timely with the objective to
decongest the books of accounts. It involves the process of pre-litigation foreclosure (through the
restructuring of loans to rehabilitate the loan, time extension etc.), foreclosure through court, post
litigation foreclosure (recovering loan by taking over the loan security as per the court verdict) and
loan write-off. Out of the court settlements are done during the process of the pre-litigation and
litigation with the leave of the court. It also stipulates the process to do the write-off of NPL by
constituting a Recovery Unit/Division by strictly following the bank’s internal strategy and target.

As an interim measure to resolve NPL during the pandemic, RMA has issued the guidelines on the
reclassification of old non-performing loans effective from May 1, 2022, with the objective of
providing one-time measures to reclassify the loan to provide the temporary relief to both the
borrower as well as the Financial Institution. The guideline was applicable to the NPL of the
Financial Institution as of March 31, 2020, for those NPL classified as absconded, untraceable,
deceased, imprisonment, and loans under enforcement. These are being aimed to resolve at a three-
tiered level such as Inter-Financial Institution Committee (IFIC), the CEO level committee, and
the High-level committee. The NPL identified under this process are classified as assets pending
foreclosure and to be resolved within three years either in the form of write-off, foreclosure or out
of court settlement process (GUIDELINES ON THE RECLASSIFICATION OF OLD, 2022) .
Such effort was complemented further with the formulation of the Rules and Regulation for Loan
restructuring by Financial Service Provider 2022 with the objective to resolve existing NPL as
well to avoid the occurrence of new NPL for the Financial Service Provider. Under this policy, the
loan restructuring facility 3shall be provided to those NPL clients based on the assessment of the
borrower by the Financial Service Provider (FSP) upon identifying and segregating the loan into
viable and non-viable loan. The viable loan is identified if the borrower under both corporate and
retail business has repayment capacity of loan, whose business or the source of the income is
affected due to some external factor causing temporary cash flow problem or liquidity hardship
due to the reduction of their income. Under the viable loan4, the client is further segmented into
willful defaulter and non-willful defaulter. The willful defaulters are those that have defaulted or
not honored the repayment of the loan even though they have potential or capacity to do that or
those clients who have not utilized the loan amount for the intended purpose and diverted to other
activities. Under this rule, different types of loan restructuring has been provided to revive 5 and
rehabilitate6 the NPL(RULES AND REGULATIONS FOR LOAN RESTRUCTURING, 2022):

3
Restructuring of loan: It is the modification of existing loan agreement/contract terms and conditions to
help borrowers who have financial difficulties in loan repayment as per the Rules and Regulation on the
restructuring loan
4
Viable Loans: Defaulted loans for which the financial institution foresees a repayment in future as per
the revised loan contract/agreement after availing loan restructuring facility.
5
Revival: Improving the financial condition of the borrower for loan repayment obligation.
6
Rehabilitation: Process of restoring the borrower’s financial condition for loan repayment obligation
Figure 1: Loan Restructuring Facilities. Source: Rules and Regulations for Loan Restructuring by
Financial Service Provider(s), 2022, RMA

Interest •Only loan interest is paid and do no have to pay the princple amount for maximum period of 2
Payment years.
only for 2
Years

•The borrower is given with the new agreement with a defined delay period in repaying the loan
Payment EMI. However, the interest for such delay period will be accrued
moratorium
for 2 years

•Addition of unpaid amount including interest and late feed to the oustanding balance for
repayment under a reschedule timeline.
Capitalization

•Extension of the loan maturity period through EMI separation into a longer period to reduce the
Extension of EMI amount
maturity
term

•Facilitating the additional top up of loan to supprot his cash flow and improve the return through
Enhanceme business
nt of credit
facilties

•Splitting of the loan outstanding in to smaller amount to reduce EMI and making afforadable to
Loan the client
Splitting

•working capital and overdraft loan are converted into a term loan.
Conversion
to term loan

Regulatory and Supervisory Reforms : As per the Annual Supervision Report 2020 released by
the Royal Monetary Authority of Bhutan, the supervisory approach of the banks is shifting from
the compliance and performance based supervisory approach to the risk based supervisory
approach to focus more on the strengthening resilience and reduce risk in the financial sector
(Bhutan, 2020).

In order to resolve the legacy NPL, RMA in collaboration with the Royal Government of Bhutan
issued fourth phases of the monetary measures providing the loan deferment, interest payment
support as kidu from His Majesty the Druk Gyalpo, extension of loan tenure and incentivizing
those loans with interest rebate of 1 percent who liquidate the loan before the installment etc. To
further bring down the NPL, RMA has issued Prompt Corrective Action (PCA) framework to the
banks whose NPL rate in the banks is above the set tolerance level.

There are several initiatives and measures in the pipeline set up by the Royal Monetary Authority
of Bhutan to mitigate the NPL in addition to the already existing rules and regulations. The strategy
and measure are focused from two strategic points as follows:

i. Identifying the gap, difficulties, challenges and short coming of the existing NPL
ii. Building a complete loop of credit ecosystem from loan origination to monitoring to
recovery and liquidation based on the robust policies rules and regulation by
leveraging on the technology and past knowledge.

The following measures are identified and bifurcated to mitigate credit risk and improve NPL
management:

Loan Origination and

Monitoring guideline
Valuation Guieline for Continuation of NPL
both land and building resolution framework

Financial crisis
credit literacy and
management standardizing auction
counselling
framework

capacity building and

enhancing inslovency
enhance corporate
regime
governance practices

(Source: Strategy on credit risk and NPL Management, RMA)

Recommendation

Most of the lending in Bhutan is collateral-based lending which means the cash flow and the
repayment capacity of the borrower and the viability of the business may not be assessed too
seriously and possibly leads to the complacency and business failure resulting in NPL. Therefore,
the collateral-based lending could be shifted principally towards the cash flow lending, business
viability and repayment capacity of the borrower as this could bring economic scale to both the
lender (less NPL) as well as borrower (less business failure). There may be robust credit risk
management system in the bank starting from loan origination to the completion of loan repayment
cycle through improving the customer due diligence, identifying the loan exposure and its risk
level, assessing the cash flow of the borrower, technical assessment and valuation of the mortgaged
asset, checking double collateralization by the borrower, checking the fraud business proposal and
effective monitoring of the loan etc. These could be helpful in preventing both pre-NPL as well as
existing legacy NPL.

Design effective policy strategies setting lending limits on the certain business activity or industry
or company to reduce the credit concentration on particular activity and loan default due to the
business failure issues or over exposure in the market. There may be deeper study conducted on
implementing interest rebate policy or incentives programs for those borrowers who liquidate the
loan before the maturity period. The policy of loan restructuring and other recovery methods may
be the best approach in mitigating the credit risk and solving the NPL as recovering the loan value
by seizing the collateral asset would worsen the borrower’s condition and block him from returning
to his normal economic status.

Since, as per the interview with the financial institution, almost all NPL are due to the genuine
loan default due to the disaster or natural calamities resulting in the loss of income and profit. Such
loss could be indemnified or covered by improving the insurance coverage policies against the
business firm especially if it is set up with the help of the loan.

In terms of the NPL resolution proceeding and settlement, out of court settlement procedure can
be more flexible, cost effective and efficient instead of completing all the tier of the litigation from
the court. However, there may be certain framework or regulations put in place regarding out of
court settlement for both the parties.

During the credit appraisal process, the Credit Information Bureau (CIB) report shall be used by
the Financial Institution as a borrower assessment tool rather than a compliance tool as such extra
due diligence in this process could help in preventing the emerging of new NPL. The CIB in
collaboration with the central bank could possibly build a central database housing the borrower’s
credit worthiness record based on the past client’s behavior of repaying the loan and doing credit
settlement on time. The same system could also be built to check the exposure level of the loan so
that financial institutions can have an access to the system to check how many loans have been
disbursed for the particular business activity and make their credit decision. Such information
through the database could serve as the early warning system for the banks to be careful while
lending to the particular borrower.

There could be stringent penalty rules and regulation instituted especially if the NPL is resulted
due to the fund diversion and not used in the intended purpose as this is tantamount to the loan
embezzlement. There may be robust awareness on the financial discipline and in the importance
of repaying the loan to the banks. There may be a common forum among the banks to discuss the
viability of the business.

There could be a strong oversight body established to ensure that the rules and regulation, policy
and guidelines in place are strictly implemented and followed during all lending phases. There
may be end to end professional development and capacity building programs for those working
under the credit Department to prevent adverse selection of the client and moral hazard.

Conclusion

The finding shows that the top 5 NPL in Bhutan in the last six years from 2016 to 2021 were
Agriculture, Trade and Commerce, Transport, Production and Manufacturing, Service and
Tourism. The top NPL financial institution in the year 2021 was Bhutan Development Bank
(among the deposit taking banks) with an NPL ratio of 14.88 percent (equivalent to Nu. 3,306.7
million) and Royal Insurance Corporation of Bhutan among the non- deposit taking banks with the
NPL ratio of 29.75 percent (equivalent to Nu. 6,133.7 million). As of December 2021, the Non-
Performing Loan under the Substandard category (91-180 days) amounted to Nu. 24,781.48
million contributing 28 percent to the total NPL, NPL under doubtful (181-365 days) contributed
Nu. 9,290.74 million equivalent to 11 percent and Nu. 53,414.27 million or 61 percent of the NPL
were under Loss (> 365 days).

The NPL in Bhutan as per the survey from the financial institution were found to be contributed
by several factors such as individual or client factors (willful defaulter, fund diversion and fraud
processing of loan, shifting of their primary business to the secondary line of business etc.), bank
specific factor (lack of operational efficiency and credit appraisal system, high loan exposure and
excess credit etc.), socio economic factor (COVID-19 pandemic, loss of income due to the business
failure, change in the national policy to the already business set up through loans) and
macroeconomic factors (due to the unprecedented inflation and national economic downturn,
unemployment etc.). As part of the policy recommendation, the lending in Bhutan could possibly
shift from collateral-based lending to the cash flow and repayment capacity of the borrower. There
could be transformation in the lending operation in the banks in terms of both policy and internal
control of the banks.

Limitation

Financial institutions as per their policy and banking norms were not allowed to disclose the
information detail of the NPL Client where this study had tried to cover. Therefore, the study with
the NPL client could not be possible.
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