Macro-prudential rules and regulations

Transcription

1 ROYAL MONETARY AUTHORITY OF BHUTAN Macro-prudential rules and regulations Debt to Equity ratio [Draft]

2 Index Part 1. Introduction Short title Authorization Application Definitions... 1 Part 2. Statement of policy Purpose Scope Responsibility... 2 Part 3. Implementation and specific requirements Limits and requirements Reporting requirements... 3 Part 4. Corrective measures Corrective measures and sanctions... 3 Effective date Effective date... 4 Annexure.1 Guidance Note... 5 Page i

3 Part 1. Introduction 1.1 Short title Debt-to-Equity ratio 1.2 Authorization The Royal Monetary Authority is authorized to issue these regulations under Section 9 (h) of the RMA Act 2010 in pursuance of the objectives stated in Sections 8 (a), 8(b), 8(d) and 8(e) of the RMA Act 2010 and Section 3 (a) of the Financial Services Act Application This regulation is applicable to all Banks and Other Financial Institutions (OFIs), (collectively Banks ) which are licensed by the RMA to perform their Banking/non-Banking functions in Bhutan. 1.4 Definitions Terms used within this regulation are as defined below, or as reasonably implied by contextual usage: i. Bank has the same meaning as in the Financial Services Act of Bhutan 2011; ii. iii. iv. Other Financial Institutions (OFIs) refers to all financial institutions except banks over which RMA can exercise and perform the powers, duties and functions conferred upon the Authority by or under the Royal Monetary Authority Act of Bhutan, 2010; Project is defined as an economic venture with a future cash flow stream and adds to the capital stock of the economy; Economic venture in this regulation means activities in the service and manufacturing sector with a future cash flow stream; v. Debt in this regulation stands for borrowing from the bank/ofis for setting up an economic venture; vi. vii. Equity means own capital component in the project either invested or shall be brought in by the borrower. Equity could be brought in by the borrower either through cash or through movable/immovable assets Infrastructure lending has the same meaning as in the Annexure II, Prudential Regulations, 2002 (amended upto 2010). Part 2. Statement of policy 2.1 Purpose This regulation is intended to ensure that borrowers have adequate financial interest in the project. In addition, it aims to contain the credit risk by way of limiting lending exposure of Page 1

4 the bank to a single project. 2.2 Scope This regulation is applicable to all non-infrastructure lending projects 2.3 Responsibility The entire responsibility of complying with the stipulations under the Debt-to-Equity ratio as prescribed by the RMA and its subsequent amendments lies with the respective Board of Directors of each bank/ other financial institution. Part 3. Implementation and specific requirements 3.1 Limits and requirements Debt-equity ratio shall be calculated as follows: Where, Total cost of the project = Debt+ Equity Debt-Equity ratio: Each Bank shall ensure that the debt-equity ratio does not exceed 75:25 where 75% is debt and 25% is equity Each Bank shall ensure that equity for a project is financed through primary sources only Each bank shall ensure that the project loan is processed only through single bank or consortium. There shall not be any multiple bank lending for the project till such time RMA comes out with a relevant circular on this Each Bank shall ensure that the borrower has financial interest in the underlying asset which is being built with bank loan. The Bank should ensure that the debt-equity ratio is maintained at each critical milestone of the project. Each bank shall decide critical milestone of the project in agreement with the borrower The economic venture which is being developed may be used as primary collateral as long as the ownership right rests with the borrower and it is free from any kind of restrictions. The value of primary collateral will be its current value on the day of the application of the loan. No future cash flow should be taken into account while deciding the value of the primary collateral The loan amount for the project against the primary collateral shall be decided as per the following formula: Loan to collateral value Page 2

5 Loan to collateral value shall vary by the size of the loan as indicated below: Loan Amount Loan to collateral value Up to Nu. 5.0 Million 90% Nu 5 mn above but upto Nu 10 mn 80% Nu 10 mn above but upto Nu 75 mn 70% More than Nu. 75 million 60% Each bank shall calculate the Approvable loan on the basis of primary collateral and credit worthiness of the borrower. Credit worthiness of borrower shall be determined by each bank on the basis of bank s internal credit risk management policy. However, the maximum permissible loan due to credit worthiness shall not exceed 20% of the loan applied for At any point in time, at least 80% of the loan value shall be collaterised either through primary or additional collateral The bank shall ensure that the borrower provides additional collateral apart from primary collateral. Additional collateral must have at least a value of The additional collateral/primary collateral should not have any encumbrance and can be released only when the loan is repaid Each bank shall ensure that under no circumstances, equity part of the project be used as either primary collateral or additional collateral. Equity and collateral shall be mutually exclusive Each bank shall ensure that repayment capacity of the borrower is sufficient enough to service the debt obligation arising out of the borrowing for this project Each bank shall verify the valuation of the equity portion (if applicable), primary collateral and additional collateral through an independent valuer who: i. is a member of a designated agency as approved by RMA, ii. iii. has no direct or indirect financial interest in the asset being financed with the loan amount; does not have any role in the approval of loan in the Bank / financial institution Banks shall take a written declaration from the borrower about whether he/she is applying to the bank for this loan for the first time or whether the borrower has taken credit facilities for the same purpose from other financial institutions Reporting requirements Page 3

6 Each bank shall report the provisions made every quarter as per format given in Annex. Part 4. Corrective measures 4.1 Corrective measures and sanctions All individual banks and other financial institutions subjected to these regulations as detailed above shall comply with the same. If a bank or a financial institution for which the Time varying capital provisioning regulations are applicable, fails to comply with the regulation and reporting requirements, the RMA may take any one or more of the appropriate corrective measures or/and impose any administrative penalties as provided under the RMA Act, 1982 and its amendments in the RMA Act 2010 and the Prudential Regulations, 2002, issued by the RMA or any other statutory provision, as applicable In alignment with extant statutory provisions, the corrective measures and sanctions may include, but are not limited to any of the following: i. Issue of a formal warning to the bank; ii. iii. iv. Agreements for undertaking remedial measures, including those limiting the operations of the institution engaged in financial services; Stipulating the Bank/its Board of Directors to inject additional capital funds to meet the provisioning requirements and impose fines up to Nu.10,000 per day for each day the short fall continues; Restrict distribution of dividends and discretionary bonuses; v. Suspend access to credit facilities of the RMA; vi. vii. viii. Suspend temporarily or permanently officers or directors from duties in the financial institutions; Order conservatorship in the case of institutions in accordance with provisions of the Part X of Prudential Regulations, 2002; Revoke the license to operate Any bank or financial institution subjected to the regulations under Debt-Equity ratio may approach the Director, FRSD, RMA for advice in advance for need of clarification on application of extant regulations and rules The regulations and rules under the Debt-Equity ratio will be reviewed and revised by the RMA from time to time as the experience of implementing such regulations is acquired over time. Effective date Page 4

7 4.2 Effective date The regulation shall come into effect on... Page 5

8 Annexure.1 Guidance Note Table 1 provides an illustrative example of application of debt equity ratio. Assume a particular project costs Nu. 100 million and debt-equity ratio is 75:25. This implies under this project the borrower shall have to bring minimum equity of Nu. 25 million and the borrower can apply for maximum loan of Nu. 75 million. Assume that the borrower brought in his equity component by way of cash of Nu. 25 million. He has a property on which he is building a hotel. The current value of the land is Nu. 30 million which the borrower pledged as primary collateral. Given the Loan to collateral value of 70% in this case, Nu. 21 million could be extended as loan against the primary collateral. However, bank through its credit risk assessment of the project, may determine a portion of the debt which does not require collateral. This may be on the basis of credit history of the borrower, viability of the project. Assume it is Nu. 15 million (i.e., this is the ceiling 20%*Nu. 75 million). This implies approvable loan based on primary collateral and the internal evaluation is Nu. 36 million. However, the applied loan amount is Nu. 75 million. This leaves a funding gap of Nu. 39 million. In this case, the borrower shall have to provide additional collateral consistent with the loan to collateral value ratio. Using the loan to collateral value of 70%, the borrower shall have to bring minimum additional collateral of Nu million (Nu. 39 million/70%). Table 1: Illustrative example S. No. Item Amount (Nu. Million) a. Project cost 100 b. Debt-Equity Ratio 75:25 c. Equity required 25 d. Loan Required 75 e. Primary Collateral Value (assumed) 30 f. Loan to Collateral Value ratio 70% g. Approvable loan based on primary collateral only (e*f) 21 h. Additional approvable loan based on internal evaluation (assumed) 15 i. Total approvable loan based on primary collateral and internal evaluation (g+h) j. Funding gap (d-i) 75-36=39 k. Loan to Collateral Value ratio 70% l. Additional collateral required (j/k) 55.7 (i.e., 39/70%) 36 Page 6

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