Thursday, November 15, 2012

Lots of money, not much to invest in


Annual Report: While some banks have been grappling with a shortage of cash, for the pension fund making best use of the fund has been the biggest challenge in the past fiscal year. 

Pension officials said they could not make good use of the fund, which has grown to Nu 12.9B as of June this year, as it had reached optimum investment size, and any further investment would have breached certain prudential norms of the central bank. 

NPPF has already provided 30 percent of the fund size to ten largest borrowers, which is the optimum investment size, according to the central bank’s prudential regulation. 

Therefore, the NPPF could not participate in funding the Dagachu hydropower project’s Nu 2.4B cost overrun. 

The funds 2011-12 annual report states there was opportunity to make further investments in Dungsam cement and the Dagachu hydropower project.  The two projects needed funds, amounting to Nu 2B each. 

The managing director of Druk Green Power corporation, Dasho Chhewang Rinzin, had earlier said they had looked for additional money for Dagachu from the local market but, due to the liquidity position, they had to look elsewhere. 

It has however got approval to inject Nu 335M, which is a 29 percent stake in Druk Holding and Investment’s wellness resort project in Punakha. 

The funds total size increased from Nu 10.68B to Nu 12.93B in June 2012, averaging a growth of Nu 2B annually in the past four years.  Net inflow of members’ contribution averaged Nu 100M monthly. 

NPPF was not affected by a liquidity crunch, because its fund flow is fixed or determined in the form of members’ monthly contribution. 

“We don’t have to look for deposits, like the financial institutions,” the fund’s head of investment department, Ugyen Tshewang, said. 

Despite not being able to invest, as it would have liked to, the fund achieved a 6.5 percent return on investment, according to the report. 

The fund’s membership also increased from 44,312 to 47,019.  This was mainly attributed to new members joining the fund, as a result of several new projects, including Dungsam Polymers, army school project, Mangdechu hydropower project and Punatshangchu II. 

During the year, the fund withdrew its cash in bank deposits by around 33 percent.  These deposits earned minimal interest rates. 

“We have adequate money to help improve liquidity in the market, but it has become impossible for us to lend money to the financial institutions,” Ugyen Tshewang said. 

The central bank had fixed the base rate or minimum lending rate for NPPF at 13 percent.  For most banks, it is ten percent.  This makes it expensive for banks to borrow from NPPF. 

The base rate in banks was derived from their own cost of funds. “Our actual base rate, if derived from the cost of fund, would have been around 7 percent,” fund officials said.  But the central bank fixed it at 13 percent, so that it does not compete with the banks. 

Uncertainties loom over the future of the fund, which already faces the issue of long-term sustainability, because of a lack of investment avenues.  The central bank has said that non-bank financial institutions, like the pension fund, would have to suspend their lending activities, starting 2014. 

“We’re very much concerned, and the only option to look at is the capital market,” Ugyen Tshewang said. “I’m sure the central bank is looking somehow to develop the capital market.”

Lending activities contribute almost 68 percent to the overall size of the pension fund. 

By Nidup Gyeltshen 

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