Here is the article rewritten in Markdown format:

Bhutan’s Banking Sector: Growing Risks Amid Economic Uncertainty

In a concerning development for Bhutan’s financial stability, experts at Fitch Solutions have warned of growing risks to the country’s banking sector over the next decade. While near-term risks are deemed low due to adequate capitalization, the sector is facing numerous challenges that could impact its stability in the long term.

Capital Adequacy Ratio

According to World Bank data, Bhutan’s capital adequacy ratio has been on a downward trend over the past decade, falling from 17% in 2012 to 12.2% in 2019. Although this remains above the central bank minimum of 10%, experts warn that such a trend could become problematic if it persists.

Impact of Global Pandemic

The ongoing global pandemic has also taken a toll on Bhutan’s economy, with tourism accounting for about 5% of GDP. As foreign tourists have been restricted since March 2020, existing bank assets with exposure to the tourism sector are expected to be subject to higher risk weights, which will weigh on capitalization.

Non-Performing Loan Ratio

In addition, the non-performing loan (NPL) ratio has more than doubled over the same period, rising from 3.9% in 2011 to 8.4% in 2019. Experts expect this trend to continue due to economic weakness from the pandemic and have warned that a rising NPL ratio could hamper monetary policy transmission and limit the effectiveness of policy interest rate cuts.

Credit Growth

Despite these challenges, Fitch Solutions forecasts credit growth to strengthen slightly but remain weak over the coming months. Credit growth has shown early signs of reversal, supported by stimulus measures announced in July, which include extension of soft loans to cottage and small industries.

Deposits Growth

In contrast, deposits growth is expected to remain strong due to a surge in remittances and a weak income outlook encouraging people to save rather than spend. This trend is likely to continue until the end of 2020, providing a buffer for banks despite the challenges faced by the sector.

Recommendations

The report’s findings highlight the need for vigilance on the part of policymakers and regulators to address the growing risks facing Bhutan’s banking sector, which could have far-reaching implications for financial stability in the country.