Loan freeze by financial institutions (FIs) for improving liquidity position is a recent phenomenon in Bhutan. All commercial banks except Bhutan Development Bank Limited were prohibited to disburse housing and vehicle loans since March 2012. These loans, being main loan portfolio, their freeze impacted net profits earned, business growth, and satisfying customers’ needs. However, other loans were being disbursed, generating meager income and compelled commercial banks to reinvent, where their strategies included cash reserve ratio, increasing interest rate of deposits, etc. Due to freeze of loans, interest earned was decreased in comparison to interest paid, necessitating deposit interest rate escalation to retain old customers, to attract new customers and to improve liquidity. Some banks, in this process, stressed out on interest rates while Druk PNBL increased rates to 11 percent with 1% hike. Most banks levied 10 percent interest on housing loans except BDBL which charged 13 percent on rural housing and agriculture loans. Thus, to improve liquidity and meeting future contingencies, banks sacrificed current revenues which affected business growth.

Loan freeze by financial institutions (FIs) for improving liquidity position is a recent phenomenon in Bhutan. All commercial banks except Bhutan Development Bank Limited were prohibited to disburse housing and vehicle loans since March 2012. These loans, being main loan portfolio, their freeze impa...