FAQs About Financial Institutions Supervision
The purposes of the RMA as set out in the RMA Act are as follows:
Bhutan's national currency is pegged to the Indian rupee at parity, for the purpose of promoting monetary stability and therefore, a primary responsibility of the RMA is to ensure the sustainability of the peg. This means that the must RMA guarantee the free convertibility of the Ngultrum against the rupee for all legitimate purposes. The public must be confident that they can at any time exchange their Ngultrum balances into rupees freely and at parity, and for this purpose the RMA must ensure that it maintains, at all times, sufficient foreign reserves to provide this free convertibility. Furthermore, the RMA has to keep the growth of M2, more or less in line with overall economic growth.
Banks and financial institutions are the depositories of the public's money. When a bank failure occurs, it is not only the owners of the bank who suffer a loss, but so too will the thousands of ordinary citizens who have placed their money in deposits with the bank. Therefore, in most countries the operations of banks and other financial institutions are regulated by the central bank in order to ensure that they operate in accordance with prudential norms and do not place themselves in a situation in which their ability to repay their depositors is jeopardized. The RMA frames prudential regulations to be observed by the institutions, and supervises them to ensure their compliance with the regulations through regular reporting requirements, as well as on-site inspections.
Loans and advances by the financial institutions are a key factor in the stability of the economy - too much of it will increase aggregate demand, thereby, possibly resulting in an increase in the rate of inflation, or an imbalance in the balance of payments, while too little of it may retard the rate of economic growth, thereby affecting output and employment. Most central banks now try to exercise control over total credit by the financial sector through indirect means such as the rate charged on advances to them, and the ratio of reserves that banks are required to maintain against their deposit liabilities. Therefore, an important responsibility of the RMA is to ensure that credit growth is consistent with the rate of growth of the economy, so that prices do not fluctuate sharply keeping in mind the special economic relationship with India. For this purpose, the Act authorizes the RMA to prescribe reserve requirements on the banks against their deposit liabilities, to issue notes, bills, securities and other evidences of indebtedness to sterilize the liquidity of the banks, and also to grant short-term loans and overdrafts to the financial institutions to inject liquidity into the economy when necessary.What is the status of RMA? The RMA was established by the Royal Monetary Authority of Bhutan Act, passed by the National Assembly in 1982. According to Part II Clause 4 of the Act, the RMA is a "body corporate with perpetual succession and a common seal". The Act provides the RMA with the power to "enter into contracts and issue obligations, sue and be sued in its own name, acquire, hold, and dispose of property.â¦â¦.," and "to exercise all powers specifically granted by the provisions of the Act, and such incidental powers as shall be necessary to carry out the powers so granted." This implies that the RMA is a statutory body that is distinct from the Government, and which is solely responsible for its own actions. However, while any action on the RMA's part cannot be construed as an act of the government, it does not mean that is not accountable to the government. Like most central banks, its accountability to the government lies in fulfilling the purposes for which it was established.
Who supervises the RMA?
In terms of its Act, all powers of the RMA are vested in its Board of Directors which is responsible for the policy and general administration. While all matters of policy are deliberated and subject to approval by the Board, certain administrative powers are delegated to the Governor and other officers. The Governor is responsible to the Board for the day-to-day administration of the Authority.
How does the RMA make profits and what are they used for?
Although the RMA is not a commercial organization driven by the profit motive, it does generate substantial surpluses from its operations. The bulk of the profits are generated from investments in financial markets abroad as part of its foreign reserve management strategy. Secondly, it receives interest income on loans and advances to the government and the financial institutions. Some income is also generated in the form of royalties on legal tender coins that it has authorized agents abroad to mint and sell on its behalf. After setting aside certain amounts in accordance with the provisions of the Act, the entire balance of the annual surplus is transferred to the Royal Government.
How are the foreign currency reserves managed?
The Act authorizes the RMA to maintain the external reserves in the form of gold, foreign exchange in the form of currency or bank balances abroad, bills of exchange and promissory notes denominated in foreign currency and payable abroad, treasury bills issued by foreign governments and international financial institutions, and securities issued or guaranteed by foreign governments and international financial institutions. Accordingly, most of the external reserves are invested in deposits with foreign central banks and well known commercial banks, as well as in treasury bills issued by foreign governments. A part of the reserves has been placed with an internationally renowned asset management company, which actively manages the funds through investments in fixed income instruments permitted under the Act. A negligible amount is held in the form of gold.
Does one need to obtain RMA's approval for foreign exchange remittances?
Beginning August 1, 2010, the RMA has delegated all foreign exchange retail businesses to commercial banks. Therefore, any remittances of foreign exchange should be processed directly from any commercial banks without reference to the RMA.
With the delegation of foreign exchange to commercial banks, is there any new regulation set out by the RMA to commercial banks for foreign exchange transaction? If yes, does the new regulation supersede the Foreign Exchange Regulations 1997?
Yes, we have Foreign Exchange Operational Guideline (August 1, 2010) in place. The Foreign Exchange Operational Guideline was framed basically to assist commercial banks in processing foreign exchange transaction. It covers basic operational rules and procedures of foreign exchange transaction. The Guideline is amendable as and when necessary and framed in line with the Foreign Exchange Regulations 1997. Hence, it will not supersede the Foreign Exchange Regulations of 1997.
What are the purposes for which foreign exchange can be obtained?
The framework for the administration of foreign exchange controls by the RMA is provided by the Foreign Exchange Regulations approved by the National Assembly in 1997. The regulations set out the purposes, amounts and the terms and conditions subject to which foreign exchange can be obtained. In addition, beginning August 1, 2010 a Foreign Exchange Operational Guideline was framed and issued with the delegation of foreign exchange retail businesses to the commercial banks. Under the guideline, foreign exchange is admissible for most current account transactions with persons resident in countries other than India.
Are there any Foreign Exchange remittances that require RMA's approval?
Yes, any other foreign exchange payments/issues not covered under the Foreign Exchange Operational Guideline (August 1, 2010) should refer to the RMA for approval and all related debt repayments.
Is Foreign Exchange available for transaction with India?
In terms of Article VII of the Trade and Commerce Agreement between Bhutan and India, transactions between persons resident in Bhutan and India are denominated in Indian rupees or Ngultrum. Therefore, foreign exchange is not admissible for any kind of travel to India, or for transactions with person resident in India.
What is the procedure for remitting foreign exchange payments for imports?
Imports from third countries require an Import License from the Department of Trade, Ministry of Economic Affairs (MoEA). The rules and procedures for importing goods from third countries are set out in the Rules and Procedures for Imports from Third Countries issued by the Department of Trade/MoEA. An importer who has obtained an Import License can remit payment in foreign exchange through an authorized bank by means of a Letter of Credit or by SWIFT/Electronic Transfer to the supplier abroad.
Who can make payments for imports without import license and what is the procedure for remitting foreign exchange payments for imports without import license?
Except for Government Agencies, no other individual or private firms are allowed to make payment for imports without import license. With prior approval from the Ministry of Finance. The gGovernment Agencies shall be allowed cash up to USD 1000.00 for import below USD 1000.00 and for import above USD 1000.00, the payment should be electronically transferred to account abroad.
Can a person be allowed to avail foreign exchange all in cash?
Yes, a person is allowed to avail foreign exchange all in cash. However, it is at the discretion of an individual either to take in Cash or Traveller Cheques.
Can one obtain foreign exchange for Private Visits Abroad?
All Bhutanese citizens irrespective of the age, traveling abroad other than India for any purposes like holidays etc., are entitled up to USD 3000 only per calendar year. The ceiling of US$ 3000 is applicable in aggregate and foreign exchange may be obtained for one or more visits provided the aggregate amount does not exceed the ceiling of US$ 3000.00.This entitlement may be drawn along with foreign exchange for other visits abroad, such as for business, studies, training or medical treatment. To avail this entitlement, an individual traveling abroad should submit a copy of confirmed Air-ticket and Passport directly to any commercial bank along with the application in Form # I of respective bank.
How much foreign exchange is available for Business Travel Abroad (BTA)?
A Bhutanese citizen with valid Trade license, traveling abroad on business to any country other than India can obtain foreign exchange at the Daily Subsistence Allowance rates prescribed by the Ministry of Finance. Therefore, the proposed itinerary and evidence in the form of airline tickets, passport, and any other documents, such as copies of correspondence with parties abroad, should be submitted directly to any commercial bank along with the application in Form # II of respective bank. Visits abroad for attending international conferences, seminars, training, study tours, market research, trade fairs etc. are treated as business trips.
Can a person obtain foreign exchange for Studies and Training Abroad (STA)?
Yes, foreign exchange is available for Bhutanese students pursuing studies in any third country. Students who have been admitted in institutions abroad may obtain foreign exchange to cover the actual fees based on fee structure from the institution. They can avail up to US dollar 900.00 per month as stipend and USD 1500.00 per month towards their living costs/incidental expenses, provided that this is not included in the institution's fees. To avail this foreign exchange, an applicant should submit all required documents directly to any commercial bank along with the application in Form # III of respective bank.
How much foreign exchange is available for medical treatment abroad (MTA)?
A person going for medical treatment is based on the approval accorded from JDWNRH Referral Committee where the illness cannot be treated either in Bhutan or India. During the travel, patient will be entitled only for the Annual Travel Scheme (ATS) and not MTA. The foreign exchange required for medical treatment will be directly wired to the designated hospital abroad upon receiving the details of the bank account and approximate cost of the treatment. Copy of the medical bill must be submitted directly to commercial banks along with the application in Form # IV of the respective bank to process foreign exchange for medical treatment.
Can a resident open a foreign currency account with a bank in Bhutan? Is multiple foreign currency account allowed? Does it require RMA's approval?
At present, only the following categories of residents are permitted to open and maintain US dollar denominated foreign currency accounts in Bhutan without RMAâs approval: Diplomatic missions and their expatriate employees. Representative offices of donor agencies and their expatriate employees.
The third country contracting firms engaged in executing projects financed by donor agencies, and their expatriate employees. Any other national of a third country who is resident in Bhutan requires priopr approval of the RMA.
Operation of multiple foreign currency account in Bhutan is not permitted. Foreign currency account is permitted only in one of the commercial banks in Bhutan and the account must be denominated in United States Dollars only, unless such accounts are funded predominately in Euro or other currencies.
Can Individual Bhutanese citizens allowed to maintain foreign currency account with a bank in Bhutan? Does it require RMA's approval?
No, Individual Bhutanese citizens are not permitted to open foreign currency account with Bank in Bhutan. However, following business entity/Agencies in Bhutan are permitted to operate foreign currency account with prior approval from the RMA: Manufacturing and services industries requiring convertible currencies for raw material import. Foreign Direct Investment Companies (FDI). Agencies/organizations receiving grants, donation or similar inward remittances in permitted convertible currency for projects that have been approved by the Royal Government.
Can a Bhutanese citizen maintain and operate foreign currency accounts abroad?
No, Bhutanese citizens resident in Bhutan are not permitted to open, maintain and operate bank accounts outside the territory of Bhutan. However, citizens who proceed abroad for purposes of work, studies, training, etc. may open accounts with banks abroad and operate them during their stay abroad.
Which foreign currencies are accepted in Bhutan?
The bank notes and travellers' cheques denominated in any of the following currencies are accepted in Bhutan.
Is it permissible to use foreign exchange for payments within Bhutan?
Except for the Indian rupee to which the Ngultrum is pegged at parity, and which circulates freely in Bhutan, paying, or receiving payments in any other foreign currency for transactions in Bhutan is illegal. Foreign residents can make payments in approved foreign currency (notes and foreign currencies - denominated cheques from foreign currency accounts) to the Duty Free Store, Handicrafts Emporium, and Druk Air.
Is there a limit on the amount of foreign exchange that may be brought into Bhutan?
There is no limit on the amount of convertible foreign exchange that may be brought into Bhutan. However, as per the Export and Import of Currency Regulations 2003, a person brining more than United States Dollars 10,000.00 or its equivalent, should declare the amount at the customs point of entry into Bhutan. There is no limit on the amount of Indian currency that a person may bring into Bhutan. However, travellers should note that under the laws of India, Indian currency notes in denominations above Rs.100 are not allowed to be sent or brought into Bhutan and Nepal.
Are there any restrictions on the amount of foreign exchange that a person can take out of Bhutan?
Convertible foreign exchange that has been obtained from authorized banks, and such additional amounts as may reasonably be in the possession of a person may be taken out of Bhutan. However, if the total value of foreign currency taken out of Bhutan exceeds United States Dollars 10,000.00 or its equivalent, the individual should declare the total value and sources of such foreign currency to customs at the time of departure.
How much Bhutanese currency can be taken out of Bhutan?
Except with the general permission of the RMA, no person may take out of Bhutan or bring into Bhutan (other than to or from India) Bhutanese currency exceeding Ngultrum 5000.00
How much Indian currency can be taken out of Bhutan?
There is no limit on the amount of Indian currency that a person may send or take from Bhutan to India. It should, however, be noted that under the laws of India, it is illegal to send or to bring Indian currency notes in denominations above Rs.100 into India from Bhutan and Nepal. Persons going to a third country from Bhutan should not carry more than Rs.5000 in Indian currency notes.
The RMA derives its role in currency management from the RMA Act 1982, which gives the RMA the sole right to issue currency notes and coins in Bhutan. The denominations and the designs of the bank notes, including their security features, and coins are decided by the Board of Directors. The quantity of notes and coins of each denomination that is likely to be needed is estimated, and tenders are called from a number of international security printers or mints. The notes and coins received from the printers and mints are stored in the vaults and issued to the banks and the public as necessary. Bank notes received back from the banks, currency chests and other members of the public are examined to determine whether they are fit for further circulation. Only those banknotes which are in good condition are re-issued for circulation, and soiled or mutilated notes are destroyed by shredding.
Who decides on the volume and value of bank notes to be printed and on what basis?
The final decision on the volume and value of the different denominations of bank notes to be printed is taken by the Board of Directors, on the basis of the management's estimates and recommendations.
How does the RMA estimate the demand for bank notes?
The quantum of bank notes that needs to be printed is broadly estimated on the basis of the rate of growth of the economy, the annual increase in the amount of bank notes in circulation, and replacement of soiled and mutilated notes.
How does the RMA reach the currency to the public?
The RMA manages its currency operations through the branches of the commercial banks located in various parts of the country, at which it maintains "currency chests". The RMA periodically supplies the currency chests with fresh notes and Ngultrum coins. The requirements of bank notes and coins by other branches of the banks for further distribution to the public are met from the currency chests.
What happens when the notes and coins return from circulation?
When notes are returned from circulation, the RMA processes the notes to separate those that are fit for re-issue from those which are soiled and mutilated and, therefore, not fit for further circulation. The notes which are fit for re-issue are sent back to circulation, and those which are unfit for re-issue are shredded so as to maintain the quality of notes in circulation .
What is the role of the financial system in an economy?
One of the important roles of a financial system is to create a conducive financial environment which encourages efficient financial intermediation and bridge the gap between depositors, lenders and the borrowers. In its simplest terms, banks mobilize money from savers and make loans, at risk to the borrowers, for a profit. In this way banks help mobilize the savings of a nation for productive investments and use in the economy.
What is the role of the Royal Monetary Authority of Bhutan (RMA) with regard to the banking/financial system?
From the Regulatory and Supervisory perspective, the Financial Institutions Act of Bhutan 1992 has empowered the RMA to promulgate sound banking and financial policies within the economy. These activities would include issuing of licenses for financial services, prescribe and implement appropriate prudential regulations and guidelines within the framework of which the financial institutions will have to operate, and see to their compliance through continuous off-site surveillance system and frequent on-site examinations. As the supervisory authority, it is the responsibility of the RMA to monitor how the financial institutions manage their risks and to promote a sound and efficient financial system within the country. To summarize the above, the health and financial performance of both banks and non-bank financial institutions are assessed from time -to-time by the RMA. Such assessments are being evaluated based on capital adequacy, asset quality, management competency and professionalism, profitability, liquidity management, and internal controls and systems. Because of their important role in the economy, banks and NBFIs have to be regulated to ensure they are prudently managed.
Why do banks and NBFIs still fail despite regulation and supervision?
Banks and NBFIs make profit by taking calculated financial risks. Among the many types of risks that the financial institutions have to manage are credit risk and liquidity risk. Credit risk is a common cause of problems because the liabilities of financial institutions are largely certain in value but the assets are uncertain in value. In other words, the financial institutions must still repay the full amount of deposit liabilities/liabilities even though the loans made by the financial institutions are those same funds, which are not repaid by the borrowers. With the margin between borrowed and lent funds often being just a few percentage points, it should be clear that just a few bad loans that are not repaid will wipe out the profits made on many loans. For this reason, banks and NBFIs are required to hold a buffer of capital so that depositor funds are kept intact even if there are unexpected losses. Unfortunately, it can happen that unforeseen events result in a spate of bad loans which can wipe out the capital of a bank. The most common underlying cause for bank failure is actually poor management. For instance, if the credit granting and debt collection processes are not extremely well managed, a bank is almost certain to feel the effects thereof in its profitability and eventually its capital adequacy in the very near future or sometime at a later stage.Despite regulation and supervision, financial institutions do fail in a financial system.
This is due to the fact that supervision is not a full-proof shield against bank/NBFI failures. It must be construed that regulation and supervision are tools geared towards prevention of such failures, which may cost the government and public heavily if it happens. But, certainly not an end in itself to completely stop bank failures.
How is a liquidity problem distinct from insolvency?
To exacerbate the problem with credit risk, banks are also naturally prone to liquidity risk. This is so, because the liabilities of banks are often relatively short-term in nature and the assets relatively invested in longer term. In other words, banks often obtain funding from depositors that can be withdrawn within days or months, but they lend to businesses and households who can only repay the loans over many years. Fortunately, deposits are "rolled over" all the time, and banks can usually manage liquidity quite well. They are also required to hold a certain amount of their assets in liquid assets that can be quickly turned into cash. Un-seemingly, it sometimes happens that a negative sentiment about a bank can cause many depositors to withdraw at once, which can cause a liquidity problem. This is not as serious as a solvency problem, where losses have wiped out capital and liabilities exceed assets. In the case of a liquidity squeeze at a clearly solvent bank, there are often many ways to avert the problem. These can include private sector involvement, for example the selling of good loan assets to other banks, or in particular circumstances special liquidity assistance by the lender of last resort or by the government.
When and how do the regulatory authorities intervene to assist banks/NBFIs in distress?
The bank supervisor relies on several sources of information about impending problems at banks or NBFIs. At the first sign of trouble well-established procedures are put in place to resolve the problems. These may include re-structuring of activities, changes in management, and re-capitalisation by shareholders. Unfortunately, in certain cases the problems that the financial institutions face could be so severe that they simply cannot be resolved in terms of normal business principles. For instance, the bank made a strategic error in pursuing a particular market niche, and technological developments have resulted in it being marginalised. In such cases, it is in the best interest of depositors for such a bank to be liquidated and removed from the banking system in an orderly fashion.
When and how do the authorities intervene to assist banks in distress?
The bank supervisor relies on several sources of information about impending problems at banks. At the first sign of trouble well-established procedures are put in place to resolve the problems. These may include re-structuring of activities, changes in management, and re-capitalisation by shareholders. Unfortunately, in some cases the problems that the bank faces are so severe that they simply cannot be resolved in terms of normal business principles. For instance, the bank made a strategic error in pursuing a particular market niche, and technological developments have resulted in it being marginalised. In such cases it is in the best interest of depositors for such a bank to be liquidated and removed from the banking system in an orderly fashion.
What is Lender of Last Resort (LOLR) assistance and when is it applicable?
In some cases the underlying causes of a bank's problems can be sustainably resolved, and the only remaining issue is a short-term liquidity problem. In such cases the RMA may provide special short-term liquidity assistance, also known as lender of last resort assistance (LOLR). There are particular prescribed circumstances and conditions under which special liquidity assistance can be provided. Such assistance could be expensive to the bank being assisted, because the central bank needs to create a disincentive for its use.
What can be done to prevent harm to depositors when banks fail?
The most difficult part for the authorities is to structure and time their intervention in such a way that, although shareholders may lose their risk capital, depositors are fully reimbursed. A key mechanism to aid with this is the curator mechanism. The appointment of a curator to a bank is a way to ensure that the actions to protect depositors take place in an orderly, controlled and equitable way. The curator has legal powers to implement actions in the interest of all depositors, which the management of the bank does not have. For instance, if there is a run on a bank, depositors that are unable to drop everything and rush to the bank may be disadvantaged, yet the management, unlike the curator, cannot refuse to pay out the early withdrawals.
How does curator-ship work?
The first thing that happens is that the curator takes over the management of the bank, freezes all deposits, and suspends certain other activities. The curator's team (comprising some outside experts but mainly existing bank staff who are considered to be key to the achievement of the task of the curator) then analyses the liquidity position of the bank and determines a threshold up to which the bank can immediately pay every depositor. The threshold and procedures to conduct withdrawals are usually announced within a few days. In most cases the large majority of deposits are below the threshold, and can be fully paid out within days. Depositors with larger balances may be allowed to access only up to the threshold, and may have to wait until the task of the curator is completed for the rest. The curator, then proceeds to analyze the business of the bank and endeavors to either re-position it as a viable concern, or obtain the best possible deal in the interest of the depositors. While it is conceivable that the bank can be saved, or a buyer for the whole bank can be found, this is unlikely, as in such a case it would have been sold in the market place long before curator-ship. Often the bank is unbundled, and different parts of its business are sold to different banks. Sometimes a "scheme of arrangement" is conceived whereby depositors and creditors agree to a settlement of some kind. While these negotiations with potential buyers are proceeding, the curator's team tries to terminate as much as possible of the leases and other cost commitments of the bank, and generally winds down operations. If the bank or any part of it cannot be sold or re-positioned as a viable concern, the curator makes a recommendation to the Registrar that the remaining parts of the bank must be liquidated. A liquidator is appointed, who proceeds to liquidate all assets, unfortunately often at prices below their real worth, and finally pays all remaining depositors a pro rata amount.Unless the bank was either in reality deeply insolvent, or something caused its assets to lose value rapidly, the depositors will ultimately be fully, or almost fully, repaid. Other creditors will then be paid, and the bank deregistered and terminated. Unfortunately, depending on circumstances, this entire process can take more than a year.
Why can clients of banks not be warned in advance of impending problems?
Sometimes the event that causes a run is so sudden and unexpected that the authorities do not have a clear understanding of the problem. In some ways the curator-ship is an opportunity to stabilize the situation so that the true circumstances can be assessed and plans developed to resolve the problem. But normally the authorities have advance warning about problems at a bank. The first objective is always to find a sustainable resolution to the problem long before it threatens depositor funds. The process of analyzing the issues and developing plans to resolve the problems in a sustainable manner carries on while the bank continues with normal business. Often the situation deteriorates further before the changes made start taking effect. If the authorities where to communicate with depositors about their concerns with the bank it would not only detract from their efforts to find a solution, but also possibly precipitate the very thing that they are working to avoid, namely a run on the bank. It is therefore standard practice for regulators worldwide to refrain from ever commenting on the affairs of a bank. A regulator would normally only confirm the licensed status of a bank, which implies that it is still in compliance with the regulatory prudential requirements.
What is deposit insurance?
A deposit insurance scheme involves the collection of a small premium from depositors to protect them from losses arising from the closure of a bank. Deposit insurance can distort the risk-reward decision-making process and therefore the effectiveness of market discipline to ensure that banks are well managed. As a result, it is almost always aimed at protecting only small depositors up to a certain amount. Provided it is well funded and can pay small depositors quickly and efficiently, a deposit insurance scheme can be of great value in improving confidence and in reducing hardship in case of bank failure. It should be remembered, however, that large institutional depositors are still expected to assess the risks of depositing with banks, and the better they do their jobs, the sooner they will be to withdraw their deposits from banks at the first sign of trouble. A deposit insurance scheme will therefore not necessarily avert a run on a bank or prevent curator-ship. It does have the advantage that it makes the process of paying back small depositors so much more orderly, equitable and transparent.
Will problems in one bank affect other banks?
It is quite often assumed that problems in one large bank will automatically spillover to other banks and endanger the system. This is a fallacy, as there is no empirical evidence to support this. In all banking crises in recent times, the problems became systemic only where other banks were all exposed to more or less the same extraneous risk, for example a rapid asset price decline, a massive capital outflow, or a sharp commodity price change.
The risk profile of spillover effects within a financial system could be high under situation, where there are inter-linkages of cross-shareholdings or relative over dependence amongst financial institutions.