The Financial Strength Rating of the Royal Insurance Corporation of Bhutan Limited (RICBL) has been downgraded to B- (Fair) from B+ (Good) and the Long-Term Issuer Credit Rating to “bb-” from “bbb-” by AM Best.
AM Best, which is a global rating agency and information provider with a unique focus on the insurance industry, has also placed these Credit Ratings (ratings) under review with negative implications.
RICBL’s Chief Executive Officer (CEO), Karma, said the rating has been downgraded because in 2018 the company was not performing well in terms of loan. “The company has high Non-Performing Loan (NPL) and it has increased as compared to previous year,” he said.
However, he said it is temporary phenomena and that the company will not incur any losses on this issue.
The CEO added that they have formed a task force team. The team will work with the borrowers to find ways to recover the money. “I am confident that the money will be recovered, which is a matter of time, unlike a normal loss like insurance loss which the company has to pay in millions and the amount will never be recovered,” Karma said.
Further, the CEO said RICBL’s financial performance in 2019 will be much better.
“The rating has reflected that the rating has been downgraded only from “bbb-“to “bb-“. If the impact on the financial balance sheet and income is more prominent then the grading will be very low,” he added.
“As a CEO I am not worried about the rating being downgraded. Our profitability of the company has been affected because our bowers could not pay back on time. Not because they are not important because we feel confident that we will get the money back,” Karma said.
According to the CEO, they have also put in place measures to improve the credit management system. By March end this year they have targeted to reduce the NPL to 15% and by June reduce the NPL to 10% and by December reduce the NPL to 5%.
Karma said the NPL was not performing well in 2018 because the economy was not vibrant and also people paid loan at the end of the year.
“But the cash flow was not there and people cannot pay at the end of the year also,” he said, adding that RICBL has Nu 19bn loan portfolio and NPL is the portion of the loan.
The CEO also said that RICBL is currently in the process of finalizing the accounts.
Meanwhile, according to AM Best, the rating downgrades reflect a deterioration in their view of RICBL’s balance sheet strength fundamentals.
While RICB has yet to finalize its year-end 2018 financial statements, AM Best reportedly expects the company to record an operating loss for the year, driven by a provision held against non-performing loans arising from its credit finance business.
According to AM Best, the impact of the operating loss is anticipated to result in a significant reduction in RICBL’s reported shareholders’ equity, which they expect will lead to weakened risk-adjusted capitalization at year-end 2018, as measured by Best’s Capital Adequacy Ratio (BCAR).
“In addition, the latest rating actions reflect concern over the company’s liquidity position and its ability to strengthen its capital base, as well as to comply with local regulatory solvency requirements,” states AM Best.
Meanwhile, the under review with negative implications status reflected the uncertainty that remains around the finalization of RICBL’s year-end 2018 financial position and prospective expectations.
In order to resolve the under review status, AM Best recommends to conduct a full assessment of RICBL’s 2018 and forward-looking balance sheet strength and operating performance fundamentals.
Further, AM Best will reportedly undertake a further review of the company’s risk management practices and consider any remedial actions being implemented to manage its exposure to non-performing loans.
It has also been stated that the ratings reflect RICB’s balance sheet strength, which AM Best categorizes as adequate, as well as its strong operating performance, neutral business profile and marginal enterprise risk management.
Dechen Dolkar from Thimphu