Royal Monetary Authority of Bhutan

ROYAL MONETARY AUTHORITY OF BHUTAN

Guidelineson Commercial Housing Loan and Home Loan (LTV and LTI restriction)

[Draft]

(1) Short title

Guidelines on Commercial Housing Loan and Home Loan

(2) Authorization

The Royal Monetary Authority is authorized to issue this Regulation 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 2011.

(3) Application

This regulation is applicable to all Banks and other Financial Institutions (collectively referred to as “Financial Institutions” or “FIs”) which are licensed by RMA to perform lending operations in Bhutan.

(4) Definitions

Terms used within this regulation are as defined below:

Borrower means a person applying for commercial housing loan or home loan.
Owners is defined as legal owners of the commercial property.
Commercial Housing Loan (CHL)shall mean loans given for the purpose of construction/purchase of house/building/apartment and shall include repair of the house/building/apartment for the purpose of generating a profit, either from business activity, resale of property or rental or lease income.
Home Loan (HL)means loan sanctioned for the purpose of construction of a house for personal residential purpose and shall include repair/purchase of house/apartment.
Borrower’s Equity refers to the borrowers’ share of loan to be made in CASH prior to the disbursement of the loan.
Loan to Value (LTV) Ratio (Financing Limit)is the maximum limit up to which a FI shall finance, which shall be based on the appraised value of the asset, which is being purchased/constructed with a loan;
Loan to Income (LTI)Ratio shall be understood as follows:

(a)In the case of CHL, it shall meanas a ratio of monthly debt obligation to that of monthly gross income from Commercial Housing of the borrower, expressed in per cent.

(b)In the case of HL, it is defined as ratio of total monthly debt obligation to that of monthly gross disposable income from all sources, expressed in per cent.

(5) Criteria (CHL & HL)

(5.1) Commercial Housing Loan (CHL)

i.CHL shall be provided only for construction/repair/purchase of house/building/apartment strictly for the purpose of generating a profit, either from business activity, resale of property or rental or lease income.

ii.Loans for repairs shall be permitted only after the first 10 years of occupancy or 10 years from the last period of repair.

iii.CHL shall only be provided in the name of the commercial entity or under the name of owners.

iv.CHL shall not be clubbed with Home Loans.

v.CHL shall be provided only by one FI and multiple raising of CHL on the same collateral shall not be permitted.

vi.CHL shall have a maximum loan limit of Nu.20 million only.

vii.CHL shall be exclusively utilized by the borrower for the purpose indicated above and in the dzongkhag and the area of location sanctioned for.

viii.CHL shall have a maximum loan term of 20 years.

(5.2) Home Loans (HL)

Home Loan shall be provided only for construction/repair/purchase of house/apartment for one unit personal dwelling.
Loans for repairs shall be permitted only after first 10 years of occupancy.
Only one member (Borrower) of a family shall be eligible for a home loan once in his/her lifetime. For the purpose of this regulation, family is defined as as a person, his spouse and dependent children.
The loans shall be exclusively utilized by the borrower for the purpose indicated above.

(6) Loan to value ratio

A financial institution shall compute the LTV ratio by using the following formula:

(6.1) Loan to Value Ratio (Financing limit) for CHL loans shall strictly be as follows:-

Loan Amount / Financing Limit (Loan to collateral value)
CH Loan Second hand Assets
Up to Nu. 5 million / 70% / 60%
Nu 5 million above but below or equal to Nu 10 million / 60% / 50%
Up to Nu 20 million / 50% / 40%
Repairs
Up to Nu. 10 million / 50%

i.The amount of loan sanctioned to a borrower shall be strictly in line with the financing limit as provided above.

ii.The loan amount can vary from dzongkhag to dzongkhag depending on the population size, economic activity and other criterias of the financial institution.However, the maximum loan limit shall be Nu.20,000,000 for construction/purchase of house/apartment and Nu.10,000,000 for repairs.

iii.The value of the property mortgaged shall be determined by a Property Valuation Committee comprising of HeadEngineer of the FIs, unitl such time the property valuation firm is licensed by the RMA.The rates shall be same for all financial institutions and shall be made public on all the FIs/RMA website and shall be reviewed annually.

(6.2) Loan to Value Ratio (Financing limit) for HL loans shall strictly be as follows:-

Loan Amount / Financing Limit (Loan to Collateral value)
Home loan Second hand Assets
Up to Nu. 1 Million / 80% / 70%
Nu 1 million above but below Nu 2 million / 70% / 60%
Up to Nu 3 million / 60% / 50%
Repairs
Up to Nu. 0.6 million / 50%

The amount of loan sanctioned to a borrower shall be strictly in line with the financing limit as provided above.

The loan amount can vary from dzongkhag to dzongkhag depending on the population size, economic activity and other criterias of the financial institution. However, the maximum loan limit shall be Nu.3,000,000 for construction/purchase of house/apartment and Nu.600,000 for repairs.

The value of the property mortgaged shall be determined by a Property Valuation Committee comprising of Head Engineer of the FIs, unitl such time the property valuation firm is licensed by the RMA.The rates shall be same for all financial institutions and shall be made public on all the FIs/RMA website and shall be reviewed annually.

(7)Debt Equity Ratio

(7.1) Debt Equity Ratio for CHL

The debt equity ratio of the loan irrespective of the loan size shall be 60:40 meaning that the Borrower shall inject 40% of the project cost as equity contribution.This equity payment shall not be a borrowed fund from a FI.

Disbursement shall be made strictly in line with the disbursement schedule, both in terms of timing and amount. Disbursement of loan shall only start once the borrower has deposited his equity portion of the total amount in cash with the FI.
Loan shall be disbursed in tranches depending on the status of the construction/transaction progress which shall be monitored by a committee of the respective FI with the independent Director as its Chairperson.

(7.2) Debt Equity Ratio for HL

The debt equity ratio of the loan irrespective of the loan size shall be 70:30 meaning the Borrower shall inject 30% of the project cost as his equity contribution.This equity payment shall be made from his personal resources and shall not be a borrowed fund from a FI

Disbursement shall be made strictly in line with the disbursement schedule, both in terms of timing and amount. Disbursement of loan shall only start once the borrower has deposited his equity portion of the total amount in cash with the FI.
Loan shall be disbursed in tranches depending on the status of the construction/transaction progress.

(8)Repayment Capacity Methodology (Loan to income ratio)

(8.1) Repayment Capacity Methodology for CHL

i.FIs shall determine the monthly repayment installment of each borrower in a manner that is consistent with the property’s monthly income.

ii.Every financial institution shall compute the LTI ratio of a borrower applying for CHL in accordance with the following formula:

iii.The monthly debt obligation of a borrower shall consist of the sum of the monthly repayment installment of CHL. The LTI limit for all types of CH loan should bea maximum of 90%.

iv.The FI shall obtain a written legal statement, with all documentary proofs, from each borrower regarding his monthly gross income from the property against which the loan was sanctioned.

(8.2) Repayment Capacity Methodology for HL

FIs shall determine the monthly repayment installment of each borrower in a manner that is consistent with each borrower’s monthly repayment capacity

Every financial institution shall compute the LTI ratio of a borrower applying for home loan in accordance with the following formula:

iii.The total monthly debt obligations of a borrower shall consist of the sum of the monthly repayment installments of all credit facilities granted by financial institutions and other creditors.

iv.The gross monthly disposable income from all sources, including the income from the collateral, shall consist of:

Source of Income / Income to be considered for the purpose of LTI calculation
Fixed Income / 100% of average of past 12 months’ income
Variable Income / Up to 70% of the average variable income for the past 12 months
Fixed and Variable Income / 100% of average past 12 months of income from fixed sources and up to 70% of average variable income for the past 12 months

v.The LTI limit for all types of home loan should be 50%.

vi.The FI shall obtain a written legal statement, with all documentary proofs, from each borrower regarding his monthly gross disposable income from all sources, all outstanding amount of credit facilities availed, monthly repayments towards them.

(8.3)The FI must ensure that the information given by the borrower is correct. The RMA shall prescribe various steps to be followed by the FI, including the self-declaration by the borrower or verification by the FI or both.

(8.4)Loan clearance certificate and collateral report from central registry shall be procured by FI prior to the approvalof loan. This report should be supplemented by additional enquiries to be made by the FIs to ensure accuracy on the borrower’s credit history and the collateral to be mortgaged. FIs and the borrowers, through a legal undertaking, shall ensure the proposed collateral is free of any debt obligations.

(9)Internal Risk management and Reporting requirements

i.FIs shall ensure complete and strict compliance to all the requirements of these guidelines in approving CHL and HL which shall be the responsibility of the Board and the management through effective and efficient MIS and internal controls in place.

ii.All FIs board shall put in place an appropriate credit risk management policy to ensure proper implementation of these regulations.

iii.All FIs shall report to RMA in line with the offsite reporting framework which shall be supplemented by onsite inspections.

iv.In case of any non-compliance to the requirements of these regulations, a fine of Nu.5000 per day shall be levied to the non-complaint FI until such time the act is rectified.

(10) Other requirements

Based on the quantum, each FI shall ensure to have their own internal yearly credit policy in terms of % of credit growth, NPL, sectoral growth etc.

(11) Applicability

These guidelines shall be applicable to all FIs (banks/insurance/pension) engaged in lending business of CHL and HL.

This regulation shall come to force with effect from 31st August 2014.