COVID-19 arrived in Bhutan in 2020, when an American citizen tested positive for the virus on 5th March 2020. The man came to Bhutan as a tourist and arrived at the Paro International Airport on 2nd March 2020.

Ever since then, COVID has imposed its effects on the Bhutanese populace in myriad ways. First came the lockdown V1: imposed from 10th August 2020, for 21 days. Another lockdown started on 23rd December 2020. And it went on.

Around the same time, Monetary Measures (MM) started coming into effect, with the SOP for MM1 coming out on 14th April 2020, which deferred all loans as of February 2020 by three months, and waived off the interest for the performing ones for three months (April – June 2020) meaning the interest burden was taken over by the government and banks in a 50:50 ratio. Along with deferring loans, other steps were taken as well, some of which are: deferred payment of sales tax and customs duty on essential items (March to June 2020), and waiver of payment of rent and other charges (April to June 2020) by tourism-related business entities leasing government properties, and so on.

Monetary Measures continued thereafter, with Phase II of the measures announced on 10th July 2020. This further allowed loans sanctioned prior to 10th April 2020 to be deferred till June 2021, and provided interest support till March 2021 (100% for the period July-Sept 2020, and 50% thereafter till March 2021). A rate discount of 1% was also offered to those who continued to repay their loans as usual despite being offered the option of deferring.

As expected, this process continued with Phase III (announced on 30th June 2021) and extended the deferment of loans till June 2022; Phase IV and IV.5 were announced on 25th June 2022 and 30th March 2023 respectively and allowed deferment up to June 2024.

We are still at it now- four years after COVID-19 hit us for the first time, and the deferments continue till June 2025. All in all, we have deferred our loans for a period of approximately 5 ½ years. We have created separate accounts for the interest accrued per deferment (except for the one currently accruing); we have paid AND refunded the interest support that the Druk Gyalpo’s Relief Kidu (DGRK) fund paid borrowers; we have extended tenures, re-scheduled loans, shut and re-opened some of them; we have moved some off-the-books and brought some of them back into the books again; we have litigated, auctioned properties, charged-off; we have taken a hit due to non-performing loans as well as while refunding the interest received from DGRK; some FIs moved on to something called the Prompt Corrective Action (PCA) framework, stopped lending and started lending again. But, as mentioned earlier, deferment continues. Perhaps it resonates with the phrase “Life has to go on and a living has to be made”?

Well, how do we understand deferment?

Let us start with a definition: Loan deferment refers to a temporary period during which borrowers are allowed to postpone making their regular loan payments. The Bhutanese population has already understood that this is an option typically granted under specific circumstances, such as financial hardship, unemployment, or otherwise. In our case, perhaps all of the above problems that the cat dragged in. We belled the cat with three (or is it four?) different vaccines, but the problems remain. But I digress…

During deferment:

• The principal amount of the loan remains unchanged. Borrowers do not make payments towards reducing the principal during the deferment period.
• Interest Accrual continues on the loan balance. However, usually, no penalties or late fees are charged. This means that even though borrowers are not making payments, the interest on the loan continues to grow based on the loan’s interest rate and the outstanding principal. As mentioned above, we have managed to handle the accrued interest portion by coming up with some creative accounting magic and moving the interest portion into separate accounts per deferment period.

Now, let us talk about the Interest Waiver thing. Interest waiver involves the forgiveness or non-accrual of interest during a specific period- which means that borrowers do not owe interest for a defined period, effectively reducing the total cost of borrowing.

Interest waiver can be:

• Partial or Full: It can apply to all or part of the interest that would otherwise accrue during the specified period.
• Temporary: It is typically implemented for a specific timeframe, after which normal interest accrual resumes.

If you read the preceding paragraph, we have tried both of these options already: first for three months starting April 2020, then for another three months, and then again for another 6 months, finally ending it in March 2021 (perhaps because we all ran out of money?).

Now, here comes the misconception part: there seems to be a common understanding amongst the Bhutanese populace that loan deferment automatically includes an interest waiver. This misunderstanding often arises because borrowers assume that deferring payments means they won’t accrue additional costs. However, most loan deferment programs still accrue interest, which is either added to the principal balance when payments resume (capitalization) or expected to be cleared off before you resume paying the EMIs. The second option actually creates a bigger headache, because on top of you being expected to pay up the accumulated interest (1 year of accrual- for the current deferment period), you will be resuming EMI payments for a SHORTER period of your loan, which means your EMI is now suddenly higher (because 5.5 years of your tenure has gone by without payments, and therefore you only have a remaining period of [full loan tenure minus 5.5 years] to pay off the loan).

In the context of public discourse or policy discussions, especially during times of economic stress such as because of COVID-19, calls for “loan deferment” are sometimes taken as shorthand for advocating for interest waivers. We always argue that borrowers facing financial hardship shouldn’t be burdened with additional interest charges during deferment periods- but what about the banks? Aren’t they losing interest if waivers happen? Don’t they face liquidity issues because the expected monthly inflows have been cut off because of deferments?

For the borrowers, understanding the terms of deferment and whether interest accrual will stop for the period is crucial for financial planning. While deferment provides short-term relief from making payments, it does not eliminate the overall debt burden. From a policy perspective, implementing interest waivers during deferment periods can provide substantial relief to borrowers- as expected by our Bhutanese businesses. However, this approach has fiscal implications for the FIs, who may end up bearing the cost of foregoing interest income, apart from the liquidity issues I have already mentioned above.

Therefore, we must understand loan deferment and interest waiver as distinct concepts with significant implications for borrowers and lenders alike: Deferment allows borrowers to temporarily halt payments without penalties, but interest typically continues to accrue. Interest waivers, on the other hand, forgive or halt interest accrual during specific periods, providing more substantial financial relief.

I have noticed that these terms often get conflated in Bhutan, and no one wants to actually clarify before opting for deferment, because we think that DGRK will again come to our rescue in 2025. Perhaps I can explain here: as of now FIs are offering deferment for loans, and NOT Interest Waivers. And even with just this option, FIs are already running short of funds to sanction new loans!

Meanwhile, perhaps a discussion about the pros and cons of loan deferment will help us understand how deferment can or cannot help us.

Like any financial decision, deferment comes with its own set of advantages and disadvantages that require careful consideration. The most significant advantage of deferring a loan lies in its ability to provide a much-needed respite during periods of financial strain, such as the one created by COVID-19. The temporary halt of the monthly payments frees up crucial cash flow, alleviating the immediate financial pressure, and allowing you to address other pressing financial obligations.

Deferment can also serve as a springboard for improving one’s overall financial health. With the freed-up funds, you can tackle other obligations, build up an emergency savings fund, or increase your income by investing to do additional work. This proactive approach can strengthen your financial foundation, making you better equipped to handle the resumed loan payments in the future. Additionally, by avoiding late fees and potential defaults, deferment can protect your credit score, a crucial factor in obtaining future loans.

Now, while the temporary relief offered by deferment is undeniable, it’s crucial to understand the long-term consequences associated with this decision. The most significant drawback lies in the accrual of interest. As mentioned already, as of now FIs are offering deferment for loans, and NOT Interest Waivers. This means interest continues to accumulate on the outstanding loan balance. If you decide that capitalization is the way forward once deferment ends, the accrued interest gets added to the principal amount at the end of the deferment period, effectively increasing the total amount owed, and therefore the monthly installment. Over time, this additional interest can significantly inflate the overall cost of the loan.

Furthermore, deferment often leads to a longer repayment term. Since the deferred payments are tacked onto the end of the loan, you end up making payments for a longer period. This not only extends the financial burden but also delays you from achieving financial freedom sooner.

Just imagine an education loan with a 7-year repayment term – deferring for a year or two would push the repayment period to 8 or 9 years, meaning an extra year of loan payments, and extra interest accumulation for the deferred period.

The reader by now probably got the point this article is trying to make: deferment is not an option you should go for, if you want to pay off your loan with the least bit of extra interest- unless there is no other option left. FIs also do not want to provide any deferment to a borrower if any alternative is at all available.

Therefore, before resorting to deferment, exploring alternative repayment options can be a prudent step. FIs usually offer re-structured repayment plans that adjust monthly payments based on your income and expenses. Additionally, some of the FIs might even be willing to work out a temporary payment modification plan that reduces the monthly payment amount for a specific period. Exhausting these options before deferment can potentially help manage financial hardship without incurring the long-term costs associated with deferment.

Ultimately, the decision to defer a loan is a personal one that requires careful consideration of both the short-term benefits and long-term implications. You should assess your current financial situation and your future earning potential, before embarking on the deferment path. Consulting with a financial advisor- perhaps your banker friend- can be immensely helpful in navigating this decision-making process.

Contributed by:
Mr. Hem Kumar Acharya
Director, Banking Operations